Should You Be Tempted To Buy Kingfisher plc (LON:KGF) At Its Current PE Ratio?
Kingfisher plc (LSE:KGF) trades with a trailing P/E of 13.1x, which is lower than the industry average of 13.1x. While KGF 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 Kingfisher
Breaking down the Price-Earnings 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 pound of the company’s earnings.
P/E Calculation for KGF
Price-Earnings Ratio = Price per share ÷ Earnings per share
KGF Price-Earnings Ratio = £3.42 ÷ £0.262 = 13.1x
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 KGF, 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. At 13.1x, KGF’s P/E is lower than its industry peers (13.1x). This implies that investors are undervaluing each dollar of KGF’s earnings. Therefore, according to this analysis, KGF is an under-priced stock.
Assumptions to watch out for
Before you jump to the conclusion that KGF 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 KGF. 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 KGF, 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 KGF to are fairly valued by the market. If this is violated, KGF’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Are you a shareholder? 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 KGF 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.
Are you a potential investor? If KGF has been on your watch list for a while, it is best you also consider its intrinsic valuation. Looking at PE on its own will not give you the full picture of the stock as an investment, so I suggest you should also look at other relative valuation metrics like EV/EBITDA or PEG.
PE is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Kingfisher for a more in-depth analysis of the stock to help you make a well-informed investment decision. Since we know a limitation of PE is it doesn’t properly account for growth, you can use our free platform to see my list of stocks with a high growth potential and see if their PE is still reasonable.
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.
