Is St James’s Place plc (LON:STJ) A Sell At Its Current PE Ratio?
St James’s Place plc (LSE:STJ) is currently trading at a trailing P/E of 49.5x, which is higher than the industry average of 18x. While STJ 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 break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for St. James’s Place
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 pound of the company’s earnings.
P/E Calculation for STJ
Price-Earnings Ratio = Price per share ÷ Earnings per share
STJ Price-Earnings Ratio = £11.91 ÷ £0.24 = 49.5x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as STJ, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since STJ’s P/E of 49.5x is higher than its industry peers (18x), it means that investors are paying more than they should for each dollar of STJ’s earnings. As such, our analysis shows that STJ represents an over-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to sell your STJ shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to STJ, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with STJ, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing STJ to are fairly valued by the market. If this is violated, STJ’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? 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 STJ. 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.
Are you a potential investor? If you are considering investing in STJ, 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 St. James’s Place 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.
