Is It Time To Buy Sanderson Farms Inc (NASDAQ:SAFM) Based Off Its PE Ratio?
Sanderson Farms Inc (NASDAQ:SAFM) is currently trading at a trailing P/E of 8.4x, which is lower than the industry average of 18.2x. While SAFM 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. View our latest analysis for Sanderson Farms
Demystifying the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. 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 SAFM
Price-Earnings Ratio = Price per share ÷ Earnings per share
SAFM Price-Earnings Ratio = $112.58 ÷ $13.48 = 8.4x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful 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 SAFM, 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 SAFM’s P/E of 8.4x is lower than its industry peers (18.2x), it means that investors are paying less than they should for each dollar of SAFM’s earnings. Therefore, according to this analysis, SAFM is an under-priced stock.
Assumptions to watch out for
Before you jump to the conclusion that SAFM 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 SAFM, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with SAFM, 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 SAFM to are fairly valued by the market. If this is violated, SAFM’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Since you may have already conducted your due diligence on SAFM, 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 SAFM’s future growth? Take a look at our free research report of analyst consensus for SAFM’s outlook.
Past Track Record: Has SAFM 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 SAFM’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.
