Peoples Bancorp Inc (NASDAQ:PEBO) is currently trading at a trailing P/E of 16.2x, which is lower than the industry average of 16.4x. While PEBO 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 Peoples Bancorp
Demystifying the P/E 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 PEBO
Price-Earnings Ratio = Price per share ÷ Earnings per share
PEBO Price-Earnings Ratio = $32.95 ÷ $2.033 = 16.2x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to PEBO, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. Since PEBO’s P/E of 16.2x is lower than its industry peers (16.4x), it means that investors are paying less than they should for each dollar of PEBO’s earnings. Therefore, according to this analysis, PEBO is an under-priced stock.
A few caveats
While our conclusion might prompt you to buy PEBO immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to PEBO, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with PEBO, 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 PEBO to are fairly valued by the market. If this does not hold, there is a possibility that PEBO’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Are you a shareholder? Since you may have already conducted your due diligence on PEBO, 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.
Are you a potential investor? If you are considering investing in PEBO, basing your decision on the PE metric at one point in time is certainly not sufficient. I recommend you do additional analysis by looking at its intrinsic valuation and using other relative valuation ratios like PEG or EV/EBITDA.
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 Peoples Bancorp 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.