Is It Time To Sell ITT Inc (NYSE:ITT) Based Off Its PE Ratio?
The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to better understand how you can grow your money by investing in ITT Inc (NYSE:ITT).
ITT Inc (NYSE:ITT) is trading with a trailing P/E of 27.9x, which is higher than the industry average of 21.9x. While ITT might seem like a stock to avoid or sell if you own it, 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 out our latest analysis for ITT
Breaking down the Price-Earnings ratio
P/E is often used for relative valuation since earnings power is a chief 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 ITT
Price-Earnings Ratio = Price per share ÷ Earnings per share
ITT Price-Earnings Ratio = $53.7 ÷ $1.928 = 27.9x
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 ITT, 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. Since ITT’s P/E of 27.9x is higher than its industry peers (21.9x), it means that investors are paying more than they should for each dollar of ITT’s earnings. As such, our analysis shows that ITT represents an over-priced stock.
A few caveats
Before you jump to the conclusion that ITT should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to ITT, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with ITT, 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 ITT to are fairly valued by the market. If this does not hold true, ITT’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to rebalance your portfolio and reduce your holdings in ITT. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned 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 ITT’s future growth? Take a look at our free research report of analyst consensus for ITT’s outlook.
Past Track Record: Has ITT 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 ITT’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.
