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Is SEGRO plc (LSE:SGRO) A Buy At Its Current Price?

SEGRO plc (LSE:SGRO) trades with a trailing P/E of 7.6x, which is lower than the industry average of 14.2x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for SEGRO

Breaking down the Price-Earnings ratio

LSE:SGRO PE PEG Gauge Nov 2nd 17
LSE:SGRO PE PEG Gauge Nov 2nd 17

A common ratio used for relative valuation is the P/E ratio. 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 pound of the company’s earnings.

P/E Calculation for SGRO

Price-Earnings Ratio = Price per share ÷ Earnings per share

SGRO Price-Earnings Ratio = 5.43 ÷ 0.717 = 7.6x

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 SGRO, 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. Since SGRO’s P/E of 7.6x is lower than its industry peers (14.2x), it means that investors are paying less than they should for each dollar of SGRO’s earnings. As such, our analysis shows that SGRO represents an under-priced stock.

Assumptions to watch out for

Before you jump to the conclusion that SGRO 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 SGRO. 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 SGRO, 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 SGRO to are fairly valued by the market. If this is violated, SGRO’s P/E may be lower than its peers as they are actually overvalued by investors.

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 SGRO 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 SGRO, basing your decision on the PE metric at one point in time is certainly not sufficient. I recommend you do additional analysis by looking at its intrinsic valuation and using other relative valuation ratios like PEG or EV/EBITDA.

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 SEGRO 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.

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