Bryn Mawr Bank Corporation (NASDAQ:BMTC) trades with a trailing P/E of 20.3x, which is higher than the industry average of 18.6x. While BMTC 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 explain what the P/E ratio is as well as what you should look out for when using it. View our latest analysis for Bryn Mawr Bank
What you need to know about 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 BMTC
Price-Earnings Ratio = Price per share ÷ Earnings per share
BMTC Price-Earnings Ratio = 44.6 ÷ 2.201 = 20.3x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to BMTC, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. BMTC’s P/E of 20.3x is higher than its industry peers (18.6x), which implies that each dollar of BMTC’s earnings is being overvalued by investors. As such, our analysis shows that BMTC represents an over-priced stock.
A few caveats
While our conclusion might prompt you to sell your BMTC shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to BMTC, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with BMTC, 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 BMTC to are fairly valued by the market. If this does not hold true, BMTC’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
Are you a shareholder? Since you may have already conducted your due diligence on BMTC, 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.
Are you a potential investor? If you are considering investing in BMTC, looking at the PE ratio on its own is not enough to make a well-informed decision. You will benefit from looking at additional analysis and considering its intrinsic valuation along with other relative valuation metrics like PEG and EV/Sales.
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 Bryn Mawr Bank 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.