Is It Time To Sell National Beverage Corp (FIZZ) Based Off Its PE Ratio?
National Beverage Corp (NASDAQ:FIZZ) is trading with a trailing P/E of 40.9x, which is higher than the industry average of 25.3x. While this makes FIZZ 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. Today, 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 FIZZ
What you need to know about the P/E ratio
P/E is a popular ratio used for relative valuation. 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 FIZZ
Price-Earnings Ratio = Price per share ÷ Earnings per share
FIZZ Price-Earnings Ratio = 102.23 ÷ 2.498 = 40.9x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as FIZZ, 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. FIZZ’s P/E of 40.9x is higher than its industry peers (25.3x), which implies that each dollar of FIZZ’s earnings is being overvalued by investors. Therefore, according to this analysis, FIZZ is an over-priced stock.
A few caveats
Before you jump to the conclusion that FIZZ 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 FIZZ, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with FIZZ, 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 FIZZ to are fairly valued by the market. If this is violated, FIZZ’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 rebalance your portfolio and reduce your holdings in FIZZ. 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 you are considering investing in FIZZ, basing your decision on the PE metric at one point in time is certainly not sufficient. I recommend you do additional analysis by looking at its intrinsic valuation and using other relative valuation ratios like PEG or EV/EBITDA.
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 National Beverage 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.
