Should You Sell Shell Midstream Partners LP. (NYSE:SHLX) At This PE Ratio?
Shell Midstream Partners LP. (NYSE:SHLX) trades with a trailing P/E of 16.3x, which is higher than the industry average of 12.3x. While SHLX 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 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 Shell Midstream Partners
Breaking down the Price-Earnings ratio
P/E is a popular ratio used for relative valuation. 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 SHLX
Price-Earnings Ratio = Price per share ÷ Earnings per share
SHLX Price-Earnings Ratio = $20.88 ÷ $1.279 = 16.3x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful 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 SHLX, 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. At 16.3x, SHLX’s P/E is higher than its industry peers (12.3x). This implies that investors are overvaluing each dollar of SHLX’s earnings. As such, our analysis shows that SHLX represents an over-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to sell your SHLX shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to SHLX. 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 SHLX, 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 SHLX to are fairly valued by the market. If this is violated, SHLX’s P/E may be lower than its peers as they are actually overvalued by investors.
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.
