The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to begin learning the link between Vector Group Ltd (NYSE:VGR)’s fundamentals and stock market performance.
Vector Group Ltd (NYSE:VGR) is currently trading at a trailing P/E of 28.2x, which is higher than the industry average of 16.8x. While this makes VGR 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 Vector Group
Breaking down the Price-Earnings ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. 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 VGR
Price-Earnings Ratio = Price per share ÷ Earnings per share
VGR Price-Earnings Ratio = $19.07 ÷ $0.676 = 28.2x
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 VGR, 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. Since VGR’s P/E of 28.2x is higher than its industry peers (16.8x), it means that investors are paying more than they should for each dollar of VGR’s earnings. As such, our analysis shows that VGR represents an over-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to sell your VGR shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to VGR. 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 VGR, 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 VGR to are fairly valued by the market. If this does not hold, there is a possibility that VGR’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 VGR. 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 VGR’s future growth? Take a look at our free research report of analyst consensus for VGR’s outlook.
- Past Track Record: Has VGR been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of VGR’s historicals for more clarity.
- 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 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.