Should You Be Tempted To Buy Nationwide Building Society (LON:NBS) At Its Current PE Ratio?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.
Nationwide Building Society (LON:NBS) is currently trading at a trailing P/E of 2.3x, which is lower than the industry average of 8.8x. While NBS 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 Nationwide Building Society
What you need to know about the P/E ratio
P/E is a popular ratio used for 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 NBS
Price-Earnings Ratio = Price per share ÷ Earnings per share
NBS Price-Earnings Ratio = £164 ÷ £70.952 = 2.3x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as NBS, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since NBS’s P/E of 2.3 is lower than its industry peers (8.8), it means that investors are paying less for each dollar of NBS’s earnings. This multiple is a median of profitable companies of 5 Mortgage companies in GB including Charter Court Financial Services Group, OneSavings Bank and Paragon Banking Group. You can think of it like this: the market is suggesting that NBS is a weaker business than the average comparable company.
A few caveats
However, 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 NBS, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with NBS, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing NBS to are fairly valued by the market. If this is violated, NBS’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Since you may have already conducted your due diligence on NBS, the undervaluation of the stock may mean it is a good time to top up on your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined 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 NBS’s future growth? Take a look at our free research report of analyst consensus for NBS’s outlook.
Past Track Record: Has NBS 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 NBS’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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
