Should You Sell Worldpay Group plc (LON:WPG) At This PE Ratio?
Worldpay Group plc (LSE:WPG) is trading with a trailing P/E of 52.2x, which is higher than the industry average of 26.7x. While this makes WPG 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. View our latest analysis for Worldpay Group
Breaking down the P/E 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 pound of the company’s earnings.
P/E Calculation for WPG
Price-Earnings Ratio = Price per share ÷ Earnings per share
WPG Price-Earnings Ratio = £4.35 ÷ £0.083 = 52.2x
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 WPG, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. Since WPG’s P/E of 52.2x is higher than its industry peers (26.7x), it means that investors are paying more than they should for each dollar of WPG’s earnings. Therefore, according to this analysis, WPG is an over-priced stock.
Assumptions to be aware of
However, before you rush out to sell your WPG 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 WPG, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with WPG, 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 WPG to are fairly valued by the market. If this does not hold true, WPG’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? 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 WPG. 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 WPG, 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 Worldpay Group 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.
