I am writing today to help inform people who are new to the stock market and want to learn about the link between company’s fundamentals and stock market performance.
HB Fuller Company (NYSE:FUL) is currently trading at a trailing P/E of 26.3, which is higher than the industry average of 22.6. Although some investors may see this as unappealing, it is important to understand the assumptions behind the P/E ratio before making judgments. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for.
Demystifying the P/E ratio
P/E is a popular ratio used for 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 FUL
Price-Earnings Ratio = Price per share ÷ Earnings per share
FUL Price-Earnings Ratio = $57.23 ÷ $2.175 = 26.3x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 FUL, 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 FUL’s P/E of 26.3 is higher than its industry peers (22.6), it means that investors are paying more for each dollar of FUL’s earnings. This multiple is a median of profitable companies of 25 Chemicals companies in US including China SNX Organic Fertilizers, ONE Bio and China Green Agriculture. You could also say that the market is suggesting that FUL is a stronger business than the average comparable company.
A few caveats
However, it is important to note that our examination of the stock is based on certain assumptions. The first is that our “similar companies” are actually similar to FUL. If not, the difference in P/E might be a result of other factors. For example, if HB Fuller Company is growing faster than its peers, then it would deserve a higher P/E ratio. Of course, it is possible that the stocks we are comparing with FUL are not fairly valued. So while we can reasonably surmise that it is optimistically valued relative to a peer group, it might be fairly valued, if the peer group is undervalued.
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 rebalance your portfolio and reduce your holdings in FUL. 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 FUL’s future growth? Take a look at our free research report of analyst consensus for FUL’s outlook.
- Past Track Record: Has FUL 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 FUL’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 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 firstname.lastname@example.org.