Does Triumph Bancorp Inc’s (TBK) PE Ratio Warrant A Buy?
Triumph Bancorp Inc (NASDAQ:TBK) is currently trading at a trailing P/E of 17.2x, which is lower than the industry average of 19.9x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. Check out our latest analysis for Triumph Bancorp
Breaking down the Price-Earnings ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. 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.
Formula
Price-Earnings Ratio = Price per share ÷ Earnings per share
P/E Calculation for TBK
Price per share = 29.15
Earnings per share = 1.691
∴ Price-Earnings Ratio = 29.15 ÷ 1.691 = 17.2x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to TBK, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since it is expected that similar companies have similar P/E ratios, we can come to some conclusions about the stock if the ratios are different.
TBK’s P/E of 17.2x is lower than its industry peers (19.9x), which implies that each dollar of TBK’s earnings is being undervalued by investors. Therefore, according to this analysis, TBK is an under-priced stock.
A few caveats
Before you jump to the conclusion that TBK represents the perfect buying opportunity, it is important to realise that our conclusion rests on two important assertions. The first is that our peer group actually contains companies that are similar to TBK. If this isn’t the case, the difference in P/E could be due to some other factors. For example, if you inadvertently compared lower risk firms with TBK, then investors would naturally value TBK at a lower price since it is a riskier investment. Similarly, if you accidentally compared higher growth firms with TBK, investors would also value TBK at a lower price since it is a lower growth investment. Both scenarios would explain why TBK has a lower P/E ratio than its peers. The second assumption that must hold true is that the stocks we are comparing TBK to are fairly valued by the market. If this assumption is violated, TBK's P/E may be lower than its peers because its peers are actually overvalued by investors.
What this means for you:
Are you a shareholder? You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to TBK. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision.
Are you a potential investor? If you are considering investing in TBK, basing your decision on the PE metric at one point in time is certainly not sufficient. I recommend you do additional analysis by looking at its intrinsic valuation and using other relative valuation ratios like PEG or EV/EBITDA.
PE is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Triumph Bancorp for a more in-depth analysis of the stock to help you make a well-informed investment decision. Since we know a limitation of PE is it doesn't properly account for growth, you can use our free platform to see my list of stocks with a high growth potential and see if their PE is still reasonable.
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.
