Urstadt Biddle Properties Inc (NYSE:UBA) is currently trading at a trailing P/E of 21.2x, which is lower than the industry average of 24.9x. While UBA 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. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for UBA
What you need to know about the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 UBA
Price-Earnings Ratio = Price per share ÷ Earnings per share
UBA Price-Earnings Ratio = $22.71 ÷ $1.071 = 21.2x
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 UBA, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. Since UBA’s P/E of 21.2x is lower than its industry peers (24.9x), it means that investors are paying less than they should for each dollar of UBA’s earnings. Therefore, according to this analysis, UBA is an under-priced stock.
A few caveats
However, before you rush out to buy UBA, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to UBA, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with UBA, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing UBA to are fairly valued by the market. If this is violated, UBA’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Are you a shareholder? If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to add more of UBA to your portfolio. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above.
Are you a potential investor? If UBA 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 Urstadt Biddle Properties 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.