Is Turning Point Brands Inc (NYSE:TPB) Attractive At This PE Ratio?
This article is intended for those of you who are at the beginning of your investing journey and want to begin learning about how to value company based on its current earnings and what are the drawbacks of this method.
Turning Point Brands Inc (NYSE:TPB) is currently trading at a trailing P/E of 30.5x, which is higher than the industry average of 18.9x. While TPB 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. 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.
View our latest analysis for Turning Point Brands
Breaking down the Price-Earnings 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 TPB
Price-Earnings Ratio = Price per share ÷ Earnings per share
TPB Price-Earnings Ratio = $34.1 ÷ $1.118 = 30.5x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as TPB, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. At 30.5x, TPB’s P/E is higher than its industry peers (18.9x). This implies that investors are overvaluing each dollar of TPB’s earnings. This multiple is a median of profitable companies of 16 Tobacco companies in US including Alliance One International, British American Tobacco and British American Tobacco. Therefore, according to this analysis, TPB is an over-priced stock.
A few caveats
While our conclusion might prompt you to sell your TPB shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to TPB, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with TPB, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing TPB to are fairly valued by the market. If this does not hold, there is a possibility that TPB’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to TPB. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for TPB’s future growth? Take a look at our free research report of analyst consensus for TPB’s outlook.
Financial Health: Are TPB’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
