Peoples Bancorp Inc (NASDAQ:PEBO) is trading with a trailing P/E of 16.5x, which is lower than the industry average of 16.8x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. In this article, 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 Peoples Bancorp
Breaking down the Price-Earnings 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 dollar of the company’s earnings.
P/E Calculation for PEBO
Price-Earnings Ratio = Price per share ÷ Earnings per share
PEBO Price-Earnings Ratio = $37.61 ÷ $2.279 = 16.5x
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 PEBO, 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. At 16.5x, PEBO’s P/E is lower than its industry peers (16.8x). This implies that investors are undervaluing each dollar of PEBO’s earnings. As such, our analysis shows that PEBO represents an under-priced stock.
A few caveats
Before you jump to the conclusion that PEBO 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 PEBO, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with PEBO, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing PEBO to are fairly valued by the market. If this does not hold, there is a possibility that PEBO’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on PEBO, 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. 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 PEBO’s future growth? Take a look at our free research report of analyst consensus for PEBO’s outlook.
- Past Track Record: Has PEBO 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 PEBO’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.