Should You Be Tempted To Sell Zebra Technologies Corporation (NASDAQ:ZBRA) Because Of Its PE Ratio?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.
Zebra Technologies Corporation (NASDAQ:ZBRA) is currently trading at a trailing P/E of 54, which is higher than the industry average of 25.4. While this might not seem positive, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for.
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What you need to know about 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 dollar of the company’s earnings.
P/E Calculation for ZBRA
Price-Earnings Ratio = Price per share ÷ Earnings per share
ZBRA Price-Earnings Ratio = $171.74 ÷ $3.181 = 54x
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 ZBRA, 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. At 54, ZBRA’s P/E is higher than its industry peers (25.4). This implies that investors are overvaluing each dollar of ZBRA’s earnings. This multiple is a median of profitable companies of 25 Electronic companies in US including ProPhotonix, Electro Scientific Industries and Hosiden. You could think of it like this: the market is pricing ZBRA as if it is a stronger company than the average of its industry group.
Assumptions to watch out for
Before you jump to conclusions it is important to realise that there are assumptions in this analysis. Firstly, that our peer group contains companies that are similar to ZBRA. If this isn’t the case, the difference in P/E could be due to other factors. Take, for example, the scenario where Zebra Technologies Corporation is growing profits more quickly than the average comparable company. In that case, the market may be correct to value it on a higher P/E ratio. Of course, it is possible that the stocks we are comparing with ZBRA 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 ZBRA. 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 ZBRA’s future growth? Take a look at our free research report of analyst consensus for ZBRA’s outlook.
Past Track Record: Has ZBRA 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 ZBRA’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 editorial-team@simplywallst.com.
