ONEOK Inc (NYSE:OKE) is currently trading at a trailing P/E of 45.1x, which is higher than the industry average of 12.4x. 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 break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for ONEOK
What you need to know about the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 OKE
Price-Earnings Ratio = Price per share ÷ Earnings per share
OKE Price-Earnings Ratio = $58.62 ÷ $1.301 = 45.1x
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 OKE, 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. OKE’s P/E of 45.1x is higher than its industry peers (12.4x), which implies that each dollar of OKE’s earnings is being overvalued by investors. Therefore, according to this analysis, OKE is an over-priced stock.
Assumptions to be aware of
However, before you rush out to sell your OKE 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 OKE, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with OKE, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing OKE to are fairly valued by the market. If this does not hold, there is a possibility that OKE’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.