Should You Be Tempted To Buy Cannae Holdings Inc (NYSE:CNNE) Because Of Its PE Ratio?
Cannae Holdings Inc (NYSE:CNNE) is trading with a trailing P/E of 11.2x, which is lower than the industry average of 13.4x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. View our latest analysis for Cannae Holdings
Breaking down the P/E ratio
The P/E ratio is one of many ratios used in 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 CNNE
Price-Earnings Ratio = Price per share ÷ Earnings per share
CNNE Price-Earnings Ratio = $18.81 ÷ $1.683 = 11.2x
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. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to CNNE, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 11.2x, CNNE’s P/E is lower than its industry peers (13.4x). This implies that investors are undervaluing each dollar of CNNE’s earnings. As such, our analysis shows that CNNE represents an under-priced stock.
Assumptions to be aware of
However, before you rush out to buy CNNE, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to CNNE. 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 CNNE, 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 CNNE to are fairly valued by the market. If this is violated, CNNE’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.
