This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between FactSet Research Systems Inc (NYSE:FDS)’s fundamentals and stock market performance.
FactSet Research Systems Inc (NYSE:FDS) trades with a trailing P/E of 33.2x, which is higher than the industry average of 16.1x. While FDS might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for FactSet Research Systems
Demystifying the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 FDS
Price-Earnings Ratio = Price per share ÷ Earnings per share
FDS Price-Earnings Ratio = $210.95 ÷ $6.35 = 33.2x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as FDS, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. FDS’s P/E of 33.2x is higher than its industry peers (16.1x), which implies that each dollar of FDS’s earnings is being overvalued by investors. As such, our analysis shows that FDS represents an over-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that FDS 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 FDS, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with FDS, 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 FDS to are fairly valued by the market. If this does not hold, there is a possibility that FDS’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 FDS, 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 FDS’s future growth? Take a look at our free research report of analyst consensus for FDS’s outlook.
- Past Track Record: Has FDS 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 FDS’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.