Is It Time To Sell Terreno Realty Corporation (NYSE:TRNO) Based Off Its PE Ratio?
Terreno Realty Corporation (NYSE:TRNO) is currently trading at a trailing P/E of 43.9x, which is higher than the industry average of 30.4x. While this makes TRNO 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. 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 Terreno Realty
Breaking down the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 TRNO
Price-Earnings Ratio = Price per share ÷ Earnings per share
TRNO Price-Earnings Ratio = $34.9 ÷ $0.795 = 43.9x
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 TRNO, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. TRNO’s P/E of 43.9x is higher than its industry peers (30.4x), which implies that each dollar of TRNO’s earnings is being overvalued by investors. As such, our analysis shows that TRNO represents an over-priced stock.
A few caveats
While our conclusion might prompt you to sell your TRNO shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to TRNO. 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 TRNO, 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 TRNO to are fairly valued by the market. If this does not hold, there is a possibility that TRNO’s P/E is lower because our peer group is overvalued by the market.
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 TRNO. 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 TRNO, looking at the PE ratio on its own is not enough to make a well-informed decision. You will benefit from looking at additional analysis and considering its intrinsic valuation along with other relative valuation metrics like PEG and EV/Sales.
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 Terreno Realty 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.
