Should You Be Tempted To Buy TravelCenters of America LLC (NASDAQ:TA) Because Of Its PE Ratio?
TravelCenters of America LLC (NASDAQ:TA) is trading with a trailing P/E of 14.7x, which is lower than the industry average of 18.4x. While this makes TA appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. 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 TravelCenters of America
Breaking down the P/E ratio
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 TA
Price-Earnings Ratio = Price per share ÷ Earnings per share
TA Price-Earnings Ratio = $3.45 ÷ $0.234 = 14.7x
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. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to TA, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. TA’s P/E of 14.7x is lower than its industry peers (18.4x), which implies that each dollar of TA’s earnings is being undervalued by investors. As such, our analysis shows that TA represents an under-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that TA is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to TA, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with TA, 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 TA to are fairly valued by the market. If this does not hold true, TA’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
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.