Should You Be Tempted To Sell PageGroup plc (LSE:PAGE) At Its Current Price?
PageGroup plc (LSE:PAGE) trades with a trailing P/E of 19.9x, which is higher than the industry average of 16.1x. While PAGE 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. See our latest analysis for PAGE
Breaking down the P/E ratio
P/E is a popular ratio used for relative valuation. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each pound of the company’s earnings.
P/E Calculation for PAGE
Price-Earnings Ratio = Price per share ÷ Earnings per share
PAGE Price-Earnings Ratio = 5.07 ÷ 0.254 = 19.9x
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 PAGE, 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. PAGE’s P/E of 19.9x is higher than its industry peers (16.1x), which implies that each dollar of PAGE’s earnings is being overvalued by investors. Therefore, according to this analysis, PAGE is an over-priced stock.
Assumptions to watch out for
Before you jump to the conclusion that PAGE should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to PAGE, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with PAGE, 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 PAGE to are fairly valued by the market. If this is violated, PAGE's P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Are you a shareholder? You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to PAGE. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision.
Are you a potential investor? If PAGE has been on your watch list for a while, it is best you also consider its intrinsic valuation. Looking at PE on its own will not give you the full picture of the stock as an investment, so I suggest you should also look at other relative valuation metrics like EV/EBITDA or PEG.
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 PageGroup 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.
