Is It Time To Buy Britvic plc (LON:BVIC) Based Off Its PE Ratio?
Britvic plc (LSE:BVIC) trades with a trailing P/E of 18.7x, which is lower than the industry average of 23.7x. While this makes BVIC appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. Check out our latest analysis for Britvic
What you need to know about the P/E ratio
The P/E ratio is one of many ratios used in 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 pound of the company’s earnings.
P/E Calculation for BVIC
Price-Earnings Ratio = Price per share ÷ Earnings per share
BVIC Price-Earnings Ratio = £7.95 ÷ £0.424 = 18.7x
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 BVIC, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since BVIC’s P/E of 18.7x is lower than its industry peers (23.7x), it means that investors are paying less than they should for each dollar of BVIC’s earnings. Therefore, according to this analysis, BVIC is an under-priced stock.
Assumptions to watch out for
Before you jump to the conclusion that BVIC is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to BVIC, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with BVIC, 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 BVIC to are fairly valued by the market. If this does not hold true, BVIC’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? Since you may have already conducted your due diligence on BVIC, the undervaluation of the stock may mean it is a good time to top up on your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined above.
Are you a potential investor? If BVIC 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 Britvic 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.
