Advertisement
U.S. markets closed
  • S&P Futures

    5,304.25
    -4.00 (-0.08%)
     
  • Dow Futures

    40,140.00
    -36.00 (-0.09%)
     
  • Nasdaq Futures

    18,465.00
    -38.75 (-0.21%)
     
  • Russell 2000 Futures

    2,145.20
    +6.80 (+0.32%)
     
  • Crude Oil

    83.11
    -0.06 (-0.07%)
     
  • Gold

    2,254.80
    +16.40 (+0.73%)
     
  • Silver

    25.10
    +0.18 (+0.74%)
     
  • EUR/USD

    1.0790
    -0.0003 (-0.03%)
     
  • 10-Yr Bond

    4.2060
    +0.0100 (+0.24%)
     
  • Vix

    13.01
    +0.23 (+1.80%)
     
  • GBP/USD

    1.2624
    +0.0002 (+0.01%)
     
  • USD/JPY

    151.4700
    +0.0980 (+0.06%)
     
  • Bitcoin USD

    70,727.01
    +839.15 (+1.20%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • FTSE 100

    7,952.62
    +20.64 (+0.26%)
     
  • Nikkei 225

    40,307.72
    +139.65 (+0.35%)
     

Should You Be Tempted To Buy Prestige Consumer Healthcare Inc (NYSE:PBH) At Its Current PE Ratio?

I am writing today to help inform people who are new to the stock market and want to begin learning about how to value company based on its current earnings and what are the drawbacks of this method.

Prestige Consumer Healthcare Inc (NYSE:PBH) is currently trading at a trailing P/E of 5.9x, which is lower than the industry average of 27.4x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. Today, I will explain what the P/E ratio is as well as what you should look out for when using it.

See our latest analysis for Prestige Consumer Healthcare

Demystifying the P/E ratio

NYSE:PBH PE PEG Gauge September 20th 18
NYSE:PBH PE PEG Gauge September 20th 18

The P/E ratio is a popular ratio used in relative valuation since earnings power is a key 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 PBH

Price-Earnings Ratio = Price per share ÷ Earnings per share

PBH Price-Earnings Ratio = $37.91 ÷ $6.42 = 5.9x

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 PBH, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. PBH’s P/E of 5.9 is lower than its industry peers (27.4), which implies that each dollar of PBH’s earnings is being undervalued by investors. This multiple is a median of profitable companies of 24 Pharmaceuticals companies in US including Osteologix Holdings, Mallinckrodt and MMJ PhytoTech. You can think of it like this: the market is suggesting that PBH is a weaker business than the average comparable company.

Assumptions to be aware of

However, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to PBH. 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 PBH, 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 PBH to are fairly valued by the market. If this is violated, PBH’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 PBH, 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:

  1. Future Outlook: What are well-informed industry analysts predicting for PBH’s future growth? Take a look at our free research report of analyst consensus for PBH’s outlook.

  2. Past Track Record: Has PBH 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 PBH’s historicals for more clarity.

  3. 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.

Advertisement