Is Equifax Inc (NYSE:EFX) A Sell At Its Current PE Ratio?
Equifax Inc (NYSE:EFX) is currently trading at a trailing P/E of 27.1x, which is higher than the industry average of 22.1x. While this makes EFX appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. Today, 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 Equifax
Demystifying the P/E 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.
P/E Calculation for EFX
Price-Earnings Ratio = Price per share ÷ Earnings per share
EFX Price-Earnings Ratio = $121.49 ÷ $4.484 = 27.1x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to EFX, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. EFX’s P/E of 27.1x is higher than its industry peers (22.1x), which implies that each dollar of EFX’s earnings is being overvalued by investors. Therefore, according to this analysis, EFX is an over-priced stock.
Assumptions to be aware of
However, before you rush out to sell your EFX shares, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to EFX. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with EFX, 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 EFX to are fairly valued by the market. If this is violated, EFX’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.
