Should You Sell The Estée Lauder Companies Inc (NYSE:EL) At This PE Ratio?
The Estée Lauder Companies Inc (NYSE:EL) trades with a trailing P/E of 43.6x, which is higher than the industry average of 21.7x. While this makes EL 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. In this article, 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 Estée Lauder Companies
Breaking down the P/E ratio
A common ratio used for relative valuation is the P/E ratio. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for EL
Price-Earnings Ratio = Price per share ÷ Earnings per share
EL Price-Earnings Ratio = $136.2 ÷ $3.126 = 43.6x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to EL, 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. EL’s P/E of 43.6x is higher than its industry peers (21.7x), which implies that each dollar of EL’s earnings is being overvalued by investors. Therefore, according to this analysis, EL is an over-priced stock.
Assumptions to watch out for
However, before you rush out to sell your EL shares, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to EL. 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 EL, 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 EL to are fairly valued by the market. If this is violated, EL’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to rebalance your portfolio and reduce your holdings in EL. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned 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 highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for EL’s future growth? Take a look at our free research report of analyst consensus for EL’s outlook.
Past Track Record: Has EL 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 EL’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.
