Is Dover Motorsports Inc (NYSE:DVD) A Buy At Its Current PE Ratio?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between Dover Motorsports Inc (NYSE:DVD)’s fundamentals and stock market performance.
Dover Motorsports Inc (NYSE:DVD) is currently trading at a trailing P/E of 8x, which is lower than the industry average of 23x. 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. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. View out our latest analysis for Dover Motorsports
Demystifying the P/E ratio
P/E is a popular ratio used for 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 DVD
Price-Earnings Ratio = Price per share ÷ Earnings per share
DVD Price-Earnings Ratio = $2.15 ÷ $0.268 = 8x
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 DVD, 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 DVD’s P/E of 8x is lower than its industry peers (23x), it means that investors are paying less than they should for each dollar of DVD’s earnings. Therefore, according to this analysis, DVD is an under-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to buy DVD immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to DVD, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with DVD, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing DVD to are fairly valued by the market. If this is violated, DVD’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to add more of DVD to your portfolio. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned 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 DVD’s future growth? Take a look at our free research report of analyst consensus for DVD’s outlook.
Past Track Record: Has DVD 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 DVD’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.
