When Should You Sell Lakeland Financial Corporation (LKFN)?
Lakeland Financial Corporation (NASDAQ:LKFN) is trading with a trailing P/E of 21.6x, which is higher than the industry average of 18.4x. While LKFN 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. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. View our latest analysis for Lakeland Financial
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 LKFN
Price-Earnings Ratio = Price per share ÷ Earnings per share
LKFN Price-Earnings Ratio = 48.93 ÷ 2.264 = 21.6x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as LKFN, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. Since LKFN's P/E of 21.6x is higher than its industry peers (18.4x), it means that investors are paying more than they should for each dollar of LKFN's earnings. Therefore, according to this analysis, LKFN is an over-priced stock.
Assumptions to watch out for
However, before you rush out to sell your LKFN shares, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to LKFN, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with LKFN, 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 LKFN to are fairly valued by the market. If this is violated, LKFN'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 rebalance your portfolio and reduce your holdings in LKFN. 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 LKFN, 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 Lakeland Financial 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.
