Is Navistar International Corporation’s (NYSE:NAV) PE Ratio A Signal To Sell For Investors?
This article is intended for those of you who are at the beginning of your investing journey and want to learn about the link between company’s fundamentals and stock market performance.
Navistar International Corporation (NYSE:NAV) is currently trading at a trailing P/E of 27.2, which is higher than the industry average of 22.1. Though this might seem to be a negative, 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 Navistar International
Breaking down the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 NAV
Price-Earnings Ratio = Price per share ÷ Earnings per share
NAV Price-Earnings Ratio = $42.18 ÷ $1.552 = 27.2x
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 NAV, 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. NAV’s P/E of 27.2 is higher than its industry peers (22.1), which implies that each dollar of NAV’s earnings is being overvalued by investors. This multiple is a median of profitable companies of 25 Machinery companies in US including EnPro Industries, Hebron Technology and Meritor. You could also say that the market is suggesting that NAV is a stronger business than the average comparable company.
Assumptions to be aware of
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 NAV. If this isn’t the case, the difference in P/E could be due to other factors. For example, if Navistar International Corporation is growing faster than its peers, then it would deserve a higher P/E ratio. We should also be aware that the stocks we are comparing to NAV may not be 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:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to rebalance your portfolio and reduce your holdings in NAV. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned 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 NAV’s future growth? Take a look at our free research report of analyst consensus for NAV’s outlook.
Past Track Record: Has NAV 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 NAV’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.
