Should You Sell Edwards Lifesciences Corporation (NYSE:EW) At This PE Ratio?
The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to begin learning the link between Edwards Lifesciences Corporation (NYSE:EW)’s fundamentals and stock market performance.
Edwards Lifesciences Corporation (NYSE:EW) is trading with a trailing P/E of 57.8x, which is higher than the industry average of 37.9x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. 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. Check out our latest analysis for Edwards Lifesciences
Demystifying the P/E ratio
The P/E ratio is one of many ratios used in 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 EW
Price-Earnings Ratio = Price per share ÷ Earnings per share
EW Price-Earnings Ratio = $153.6 ÷ $2.658 = 57.8x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to EW, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. EW’s P/E of 57.8x is higher than its industry peers (37.9x), which implies that each dollar of EW’s earnings is being overvalued by investors. As such, our analysis shows that EW represents an over-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to sell your EW shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to EW, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with EW, 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 EW to are fairly valued by the market. If this does not hold true, EW’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to EW. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. 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 highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for EW’s future growth? Take a look at our free research report of analyst consensus for EW’s outlook.
Past Track Record: Has EW 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 EW’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.
