Is Liberty Property Trust (NYSE:LPT) A Buy At Its Current PE Ratio?
Liberty Property Trust (NYSE:LPT) is currently trading at a trailing P/E of 17.9x, which is lower than the industry average of 30.4x. While this makes LPT appear like a great stock to buy, 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. View our latest analysis for Liberty Property Trust
What you need to know about the P/E ratio
The P/E ratio is one of many ratios used in relative valuation. 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 LPT
Price-Earnings Ratio = Price per share ÷ Earnings per share
LPT Price-Earnings Ratio = $42.61 ÷ $2.383 = 17.9x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as LPT, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 17.9x, LPT’s P/E is lower than its industry peers (30.4x). This implies that investors are undervaluing each dollar of LPT’s earnings. Therefore, according to this analysis, LPT is an under-priced stock.
Assumptions to watch out for
Before you jump to the conclusion that LPT is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to LPT. 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 LPT, 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 LPT to are fairly valued by the market. If this does not hold true, LPT’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
Are you a shareholder? 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 LPT 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.
Are you a potential investor? If you are considering investing in LPT, looking at the PE ratio on its own is not enough to make a well-informed decision. You will benefit from looking at additional analysis and considering its intrinsic valuation along with other relative valuation metrics like PEG and EV/Sales.
PE is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Liberty Property Trust for a more in-depth analysis of the stock to help you make a well-informed investment decision. Since we know a limitation of PE is it doesn’t properly account for growth, you can use our free platform to see my list of stocks with a high growth potential and see if their PE is still reasonable.
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.
