This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in Höegh LNG Partners LP (NYSE:HMLP).
Höegh LNG Partners LP (NYSE:HMLP) is trading with a trailing P/E of 11.5x, which is lower than the industry average of 13.3x. While HMLP 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 deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. View out our latest analysis for Höegh LNG Partners
Breaking down the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. 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 HMLP
Price-Earnings Ratio = Price per share ÷ Earnings per share
HMLP Price-Earnings Ratio = $18.1 ÷ $1.575 = 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. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as HMLP, 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. Since HMLP’s P/E of 11.5x is lower than its industry peers (13.3x), it means that investors are paying less than they should for each dollar of HMLP’s earnings. As such, our analysis shows that HMLP represents an under-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that HMLP 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 HMLP, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with HMLP, 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 HMLP to are fairly valued by the market. If this does not hold true, HMLP’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to HMLP. 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. 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 urge you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for HMLP’s future growth? Take a look at our free research report of analyst consensus for HMLP’s outlook.
- Past Track Record: Has HMLP 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 HMLP’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.