Does Walgreens Boots Alliance Inc’s (NASDAQ:WBA) PE Ratio Signal A Buying Opportunity?
Walgreens Boots Alliance Inc (NASDAQ:WBA) is trading with a trailing P/E of 18.5x, which is lower than the industry average of 21.1x. While this makes WBA appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. 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 Walgreens Boots Alliance
What you need to know about the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for WBA
Price-Earnings Ratio = Price per share ÷ Earnings per share
WBA Price-Earnings Ratio = $67.57 ÷ $3.646 = 18.5x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful 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 WBA, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 18.5x, WBA’s P/E is lower than its industry peers (21.1x). This implies that investors are undervaluing each dollar of WBA’s earnings. Therefore, according to this analysis, WBA is an under-priced stock.
A few caveats
While our conclusion might prompt you to buy WBA immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to WBA. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with WBA, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing WBA to are fairly valued by the market. If this is violated, WBA’s P/E may be lower than its peers as they are actually overvalued by investors.
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.
