Is It Time To Sell Lakeland Bancorp Inc (NASDAQ:LBAI) Based Off Its PE Ratio?
Lakeland Bancorp Inc (NASDAQ:LBAI) is currently trading at a trailing P/E of 17.8x, which is higher than the industry average of 17.3x. 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. Check out our latest analysis for Lakeland Bancorp
Demystifying the P/E ratio
The P/E ratio is one of many ratios used in relative valuation. 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 LBAI
Price-Earnings Ratio = Price per share ÷ Earnings per share
LBAI Price-Earnings Ratio = $19.5 ÷ $1.098 = 17.8x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to LBAI, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since LBAI’s P/E of 17.8x is higher than its industry peers (17.3x), it means that investors are paying more than they should for each dollar of LBAI’s earnings. As such, our analysis shows that LBAI represents an over-priced stock.
Assumptions to be aware of
However, before you rush out to sell your LBAI shares, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to LBAI. 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 LBAI, 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 LBAI to are fairly valued by the market. If this does not hold, there is a possibility that LBAI’s P/E is lower because our peer group is 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.
