Is Myriad Genetics Inc (NASDAQ:MYGN) Attractive At Its Current PE Ratio?
This article is intended for those of you who are at the beginning of your investing journey and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.
Myriad Genetics Inc (NASDAQ:MYGN) is trading with a trailing P/E of 24.5x, which is lower than the industry average of 26.4x. While this makes MYGN 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 break down what the P/E ratio is, how to interpret it and what to watch out for.
See our latest analysis for Myriad Genetics
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 MYGN
Price-Earnings Ratio = Price per share ÷ Earnings per share
MYGN Price-Earnings Ratio = $46.35 ÷ $1.889 = 24.5x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 MYGN, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. MYGN’s P/E of 24.5 is lower than its industry peers (26.4), which implies that each dollar of MYGN’s earnings is being undervalued by investors. This multiple is a median of profitable companies of 24 Biotechs companies in US including HEALTHeUNIVERSE, Forward Pharma and Portage Biotech. You can think of it like this: the market is suggesting that MYGN is a weaker business than the average comparable company.
Assumptions to watch out for
Before you jump to conclusions it is important to realise that our assumptions rests on two assertions. The first is that our “similar companies” are actually similar to MYGN, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with MYGN, 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 MYGN to are fairly valued by the market. If this does not hold, there is a possibility that MYGN’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 MYGN, the undervaluation of the stock may mean it is a good time to top up on 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for MYGN’s future growth? Take a look at our free research report of analyst consensus for MYGN’s outlook.
Past Track Record: Has MYGN 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 MYGN’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.
