Maui Land & Pineapple Company Inc (NYSE:MLP) is currently trading at a trailing P/E of 17.2x, which is higher than the industry average of 12.5x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for Maui Land & Pineapple Company
What you need to know about 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 MLP
Price-Earnings Ratio = Price per share ÷ Earnings per share
MLP Price-Earnings Ratio = $17.5 ÷ $1.015 = 17.2x
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 MLP, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. MLP’s P/E of 17.2x is higher than its industry peers (12.5x), which implies that each dollar of MLP’s earnings is being overvalued by investors. As such, our analysis shows that MLP represents an over-priced stock.
Assumptions to watch out for
However, before you rush out to sell your MLP shares, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to MLP. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with MLP, 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 MLP to are fairly valued by the market. If this does not hold true, MLP’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
Are you a shareholder? 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 MLP. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above.
Are you a potential investor? If you are considering investing in MLP, looking at the PE ratio on its own is not enough to make a well-informed decision. You will benefit from looking at additional analysis and considering its intrinsic valuation along with other relative valuation metrics like PEG and EV/Sales.
PE is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Maui Land & Pineapple Company for a more in-depth analysis of the stock to help you make a well-informed investment decision. Since we know a limitation of PE is it doesn’t properly account for growth, you can use our free platform to see my list of stocks with a high growth potential and see if their PE is still reasonable.
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.