Should You Be Tempted To Buy Ultra Clean Holdings Inc (NASDAQ:UCTT) At Its Current PE Ratio?
I am writing today to help inform people who are new to the stock market and want to better understand how you can grow your money by investing in Ultra Clean Holdings Inc (NASDAQ:UCTT).
Ultra Clean Holdings Inc (NASDAQ:UCTT) is trading with a trailing P/E of 6.9x, which is lower than the industry average of 22.8x. While UCTT 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. See our latest analysis for Ultra Clean Holdings
Breaking down the Price-Earnings ratio
The P/E ratio is one of many ratios used in relative valuation. 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 UCTT
Price-Earnings Ratio = Price per share ÷ Earnings per share
UCTT Price-Earnings Ratio = $17.13 ÷ $2.49 = 6.9x
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 UCTT, 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. Since UCTT’s P/E of 6.9x is lower than its industry peers (22.8x), it means that investors are paying less than they should for each dollar of UCTT’s earnings. Therefore, according to this analysis, UCTT is an under-priced stock.
A few caveats
While our conclusion might prompt you to buy UCTT immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to UCTT, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with UCTT, 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 UCTT to are fairly valued by the market. If this is violated, UCTT’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
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 UCTT 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. 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for UCTT’s future growth? Take a look at our free research report of analyst consensus for UCTT’s outlook.
Past Track Record: Has UCTT 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 UCTT’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 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.
