Is Hannover Rück SE (FRA:HNR1) Attractive At This PE Ratio?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to learn about the link between company’s fundamentals and stock market performance.
Hannover Rück SE (FRA:HNR1) is currently trading at a trailing P/E of 14.6, which is higher than the industry average of 11.7. While this might not seem positive, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, 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 Hannover Rück
Demystifying the P/E ratio
P/E is often used for relative valuation since earnings power is a chief 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 HNR1
Price-Earnings Ratio = Price per share ÷ Earnings per share
HNR1 Price-Earnings Ratio = €118.7 ÷ €8.117 = 14.6x
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 HNR1, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. HNR1’s P/E of 14.6 is higher than its industry peers (11.7), which implies that each dollar of HNR1’s earnings is being overvalued by investors. This multiple is a median of profitable companies of 5 Insurance companies in DE including Wüstenrot & Württembergische, NÜRNBERGER Beteiligungs-Aktiengesellschaft and Talanx. You could think of it like this: the market is pricing HNR1 as if it is a stronger company than the average of its industry group.
Assumptions to watch out for
Before you jump to conclusions it is important to realise that there are assumptions in this analysis. Firstly, that our peer group contains companies that are similar to HNR1. If this isn’t the case, the difference in P/E could be due to other factors. For example, if Hannover Rück SE is growing faster than its peers, then it would deserve a higher P/E ratio. Of course, it is possible that the stocks we are comparing with HNR1 are not fairly valued. So while we can reasonably surmise that it is optimistically valued relative to a peer group, it might be fairly valued, if the peer group is undervalued.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to HNR1. 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. 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for HNR1’s future growth? Take a look at our free research report of analyst consensus for HNR1’s outlook.
Past Track Record: Has HNR1 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 HNR1’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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
