DST Systems Inc (NYSE:DST) is trading with a trailing P/E of 11.5x, which is lower than the industry average of 24.3x. 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. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. Check out our latest analysis for DST Systems
Breaking down the Price-Earnings ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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 DST
Price-Earnings Ratio = Price per share ÷ Earnings per share
DST Price-Earnings Ratio = $83.67 ÷ $7.28 = 11.5x
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 DST, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. DST’s P/E of 11.5x is lower than its industry peers (24.3x), which implies that each dollar of DST’s earnings is being undervalued by investors. Therefore, according to this analysis, DST is an under-priced stock.
A few caveats
Before you jump to the conclusion that DST is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to DST, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with DST, 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 DST to are fairly valued by the market. If this does not hold true, DST’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to add more of DST to your portfolio. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for DST’s future growth? Take a look at our free research report of analyst consensus for DST’s outlook.
- Past Track Record: Has DST been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of DST’s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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.