Is Panhandle Oil and Gas Inc (NYSE:PHX) A Sell At Its Current PE Ratio?
Panhandle Oil and Gas Inc (NYSE:PHX) trades with a trailing P/E of 20.7x, which is higher than the industry average of 13.8x. While PHX 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 deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. See our latest analysis for Panhandle Oil and Gas
Breaking down the Price-Earnings ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key 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 PHX
Price-Earnings Ratio = Price per share ÷ Earnings per share
PHX Price-Earnings Ratio = $20.95 ÷ $1.012 = 20.7x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful 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 PHX, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since PHX’s P/E of 20.7x is higher than its industry peers (13.8x), it means that investors are paying more than they should for each dollar of PHX’s earnings. Therefore, according to this analysis, PHX is an over-priced stock.
Assumptions to watch out for
Before you jump to the conclusion that PHX 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 PHX, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with PHX, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing PHX to are fairly valued by the market. If this does not hold true, PHX’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on PHX, 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for PHX’s future growth? Take a look at our free research report of analyst consensus for PHX’s outlook.
Past Track Record: Has PHX 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 PHX’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.
