Is It Time To Buy Patrick Industries Inc (NASDAQ:PATK) Based Off Its PE Ratio?
Patrick Industries Inc (NASDAQ:PATK) trades with a trailing P/E of 17x, which is lower than the industry average of 23.1x. While PATK might seem like an attractive stock to buy, 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. Check out our latest analysis for Patrick Industries
Demystifying the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 PATK
Price-Earnings Ratio = Price per share ÷ Earnings per share
PATK Price-Earnings Ratio = $60.1 ÷ $3.538 = 17x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as PATK, 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. At 17x, PATK’s P/E is lower than its industry peers (23.1x). This implies that investors are undervaluing each dollar of PATK’s earnings. Therefore, according to this analysis, PATK is an under-priced stock.
A few caveats
However, before you rush out to buy PATK, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to PATK. 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 PATK, 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 PATK to are fairly valued by the market. If this does not hold true, PATK’s lower P/E ratio may be because firms in our peer group are 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 undervaluation could signal a good buying opportunity to increase your exposure to PATK. 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for PATK’s future growth? Take a look at our free research report of analyst consensus for PATK’s outlook.
Past Track Record: Has PATK 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 PATK’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.
