Should You Be Tempted To Buy Atlas Air Worldwide Holdings Inc (NASDAQ:AAWW) At Its Current PE Ratio?
Atlas Air Worldwide Holdings Inc (NASDAQ:AAWW) is currently trading at a trailing P/E of 7x, which is lower than the industry average of 20.5x. While AAWW might seem like an attractive stock to buy, 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. View our latest analysis for Atlas Air Worldwide Holdings
Breaking down 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 AAWW
Price-Earnings Ratio = Price per share ÷ Earnings per share
AAWW Price-Earnings Ratio = $62.35 ÷ $8.888 = 7x
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 AAWW, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. AAWW’s P/E of 7x is lower than its industry peers (20.5x), which implies that each dollar of AAWW’s earnings is being undervalued by investors. As such, our analysis shows that AAWW represents an under-priced stock.
A few caveats
Before you jump to the conclusion that AAWW is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to AAWW. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with AAWW, 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 AAWW to are fairly valued by the market. If this is violated, AAWW’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.
