This analysis is intended to introduce important early concepts to people who are starting to invest and want to better understand how you can grow your money by investing in Red Rock Resorts Inc (NASDAQ:RRR).
Red Rock Resorts Inc (NASDAQ:RRR) is currently trading at a trailing P/E of 35.6x, which is higher than the industry average of 23.1x. While this makes RRR appear like a stock to avoid or sell if you own it, 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. Check out our latest analysis for Red Rock Resorts
Breaking down the Price-Earnings 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 RRR
Price-Earnings Ratio = Price per share ÷ Earnings per share
RRR Price-Earnings Ratio = $34.72 ÷ $0.974 = 35.6x
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. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as RRR, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. RRR’s P/E of 35.6x is higher than its industry peers (23.1x), which implies that each dollar of RRR’s earnings is being overvalued by investors. As such, our analysis shows that RRR represents an over-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to sell your RRR shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to RRR. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with RRR, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing RRR to are fairly valued by the market. If this does not hold true, RRR’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 RRR, 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 RRR’s future growth? Take a look at our free research report of analyst consensus for RRR’s outlook.
- Past Track Record: Has RRR 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 RRR’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.