Thor Industries Inc (NYSE:THO) is trading with a trailing P/E of 12.9x, which is higher than the industry average of 10.6x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. In this article, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. Check out our latest analysis for Thor Industries
Breaking down the P/E ratio
The P/E ratio is one of many ratios used in relative valuation. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for THO
Price-Earnings Ratio = Price per share ÷ Earnings per share
THO Price-Earnings Ratio = $107.55 ÷ $8.341 = 12.9x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to THO, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. Since THO’s P/E of 12.9x is higher than its industry peers (10.6x), it means that investors are paying more than they should for each dollar of THO’s earnings. As such, our analysis shows that THO represents an over-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that THO should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to THO, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with THO, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing THO to are fairly valued by the market. If this does not hold, there is a possibility that THO’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on THO, the overvaluation of the stock may mean it is a good time to reduce your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for THO’s future growth? Take a look at our free research report of analyst consensus for THO’s outlook.
- Past Track Record: Has THO been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of THO’s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.