Is It Time To Sell Sirius XM Holdings Inc (NASDAQ:SIRI) Based Off Its PE Ratio?
Sirius XM Holdings Inc (NASDAQ:SIRI) is currently trading at a trailing P/E of 45x, which is higher than the industry average of 17.1x. While SIRI 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 explain what the P/E ratio is as well as what you should look out for when using it. View our latest analysis for Sirius XM Holdings
Breaking down the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key 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 SIRI
Price-Earnings Ratio = Price per share ÷ Earnings per share
SIRI Price-Earnings Ratio = $6.29 ÷ $0.14 = 45x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as SIRI, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 45x, SIRI’s P/E is higher than its industry peers (17.1x). This implies that investors are overvaluing each dollar of SIRI’s earnings. As such, our analysis shows that SIRI represents an over-priced stock.
Assumptions to be aware of
However, before you rush out to sell your SIRI 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 SIRI. 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 SIRI, 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 SIRI to are fairly valued by the market. If this is violated, SIRI’s P/E may be lower than its peers as they are actually overvalued by investors.
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.
