Is Synovus Financial Corp’s (NYSE:SNV) PE Ratio A Signal To Sell For Investors?
Synovus Financial Corp (NYSE:SNV) is currently trading at a trailing P/E of 19.4x, which is higher than the industry average of 16.6x. While this makes SNV 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. See our latest analysis for Synovus Financial
Demystifying 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 dollar of the company’s earnings.
P/E Calculation for SNV
Price-Earnings Ratio = Price per share ÷ Earnings per share
SNV Price-Earnings Ratio = $48.43 ÷ $2.495 = 19.4x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to SNV, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. SNV’s P/E of 19.4x is higher than its industry peers (16.6x), which implies that each dollar of SNV’s earnings is being overvalued by investors. Therefore, according to this analysis, SNV is an over-priced stock.
Assumptions to watch out for
However, before you rush out to sell your SNV 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 SNV, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with SNV, 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 SNV to are fairly valued by the market. If this does not hold true, SNV’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? 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 SNV. 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 SNV has been on your watch list for a while, it is best you also consider its intrinsic valuation. Looking at PE on its own will not give you the full picture of the stock as an investment, so I suggest you should also look at other relative valuation metrics like EV/EBITDA or PEG.
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 Synovus 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.
