Should You Be Tempted To Sell Spirax-Sarco Engineering plc (LON:SPX) 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 Spirax-Sarco Engineering plc (LON:SPX).
Spirax-Sarco Engineering plc (LON:SPX) is trading with a trailing P/E of 30.1x, which is higher than the industry average of 21.1x. While this makes SPX appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View out our latest analysis for Spirax-Sarco Engineering
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 SPX
Price-Earnings Ratio = Price per share ÷ Earnings per share
SPX Price-Earnings Ratio = £64.6 ÷ £2.144 = 30.1x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as SPX, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since SPX’s P/E of 30.1x is higher than its industry peers (21.1x), it means that investors are paying more than they should for each dollar of SPX’s earnings. As such, our analysis shows that SPX represents an over-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to sell your SPX shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to SPX. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with SPX, 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 SPX to are fairly valued by the market. If this does not hold, there is a possibility that SPX’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
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 SPX. 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. 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 highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for SPX’s future growth? Take a look at our free research report of analyst consensus for SPX’s outlook.
Past Track Record: Has SPX 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 SPX’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.
