Should You Be Tempted To Sell Equity Residential (NYSE:EQR) At Its Current PE Ratio?
Equity Residential (NYSE:EQR) trades with a trailing P/E of 29.8x, which is higher than the industry average of 22.7x. While EQR might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. View our latest analysis for Equity Residential
Breaking down the Price-Earnings 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 EQR
Price-Earnings Ratio = Price per share ÷ Earnings per share
EQR Price-Earnings Ratio = $61.21 ÷ $2.052 = 29.8x
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 EQR, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since EQR’s P/E of 29.8x is higher than its industry peers (22.7x), it means that investors are paying more than they should for each dollar of EQR’s earnings. Therefore, according to this analysis, EQR is an over-priced stock.
Assumptions to watch out for
However, before you rush out to sell your EQR shares, 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 EQR, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with EQR, 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 EQR to are fairly valued by the market. If this is violated, EQR’s P/E may be lower than its peers as they are actually overvalued by investors.
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.
