This analysis is intended to introduce important early concepts to people who are starting to invest and want to better understand how you can grow your money by investing in Enterprise Products Partners LP (NYSE:EPD).
Enterprise Products Partners LP (NYSE:EPD) is trading with a trailing P/E of 20.6x, which is higher than the industry average of 13.4x. While this makes EPD appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, 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 Enterprise Products Partners
Breaking down the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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 EPD
Price-Earnings Ratio = Price per share ÷ Earnings per share
EPD Price-Earnings Ratio = $27.93 ÷ $1.356 = 20.6x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to EPD, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. At 20.6x, EPD’s P/E is higher than its industry peers (13.4x). This implies that investors are overvaluing each dollar of EPD’s earnings. As such, our analysis shows that EPD represents an over-priced stock.
A few caveats
However, before you rush out to sell your EPD shares, 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 EPD, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with EPD, 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 EPD to are fairly valued by the market. If this does not hold, there is a possibility that EPD’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 EPD, the overvaluation of the stock may mean it is a good time to reduce 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 highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for EPD’s future growth? Take a look at our free research report of analyst consensus for EPD’s outlook.
- Past Track Record: Has EPD 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 EPD’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.