Should You Be Tempted To Buy Hugoton Royalty Trust (NYSE:HGT) At Its Current PE Ratio?
Hugoton Royalty Trust (NYSE:HGT) trades with a trailing P/E of 6.5x, which is lower than the industry average of 13.9x. While HGT 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. Today, 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 Hugoton Royalty Trust
Demystifying the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 HGT
Price-Earnings Ratio = Price per share ÷ Earnings per share
HGT Price-Earnings Ratio = $0.75 ÷ $0.115 = 6.5x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to HGT, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. At 6.5x, HGT’s P/E is lower than its industry peers (13.9x). This implies that investors are undervaluing each dollar of HGT’s earnings. Therefore, according to this analysis, HGT is an under-priced stock.
A few caveats
However, before you rush out to buy HGT, 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 HGT, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with HGT, 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 HGT to are fairly valued by the market. If this is violated, HGT’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.
