Is It Time To Sell ACCO Brands Corporation (NYSE:ACCO) Based Off Its PE Ratio?
ACCO Brands Corporation (NYSE:ACCO) trades with a trailing P/E of 18.9x, which is higher than the industry average of 18x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. In this article, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. View our latest analysis for ACCO Brands
Breaking down 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 ACCO
Price-Earnings Ratio = Price per share ÷ Earnings per share
ACCO Price-Earnings Ratio = $11.15 ÷ $0.589 = 18.9x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to ACCO, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 18.9x, ACCO’s P/E is higher than its industry peers (18x). This implies that investors are overvaluing each dollar of ACCO’s earnings. Therefore, according to this analysis, ACCO is an over-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that ACCO should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to ACCO. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with ACCO, 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 ACCO to are fairly valued by the market. If this does not hold true, ACCO’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
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.
