Yahoo Finance Should You Be Tempted To Buy Spectrum Brands Holdings Inc (NYSE:SPB) At Its Current PE Ratio?
I am writing today to help inform people who are new to the stock market and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.
Spectrum Brands Holdings Inc (NYSE:SPB) trades with a trailing P/E of 6.4x, which is lower than the industry average of 22.2x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. 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.
See our latest analysis for Spectrum Brands Holdings
What you need to know about the P/E ratio
P/E is a popular ratio used for relative valuation. 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 SPB
Price-Earnings Ratio = Price per share ÷ Earnings per share
SPB Price-Earnings Ratio = $87.91 ÷ $13.811 = 6.4x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to SPB, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. SPB’s P/E of 6.4 is lower than its industry peers (22.2), which implies that each dollar of SPB’s earnings is being undervalued by investors. This multiple is a median of profitable companies of 8 Household Products companies in US including Ocean Bio-Chem, Church & Dwight and Central Garden & Pet. One could put it like this: the market is pricing SPB as if it is a weaker company than the average company in its industry.
A few caveats
However, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to SPB, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with SPB, 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 SPB to are fairly valued by the market. If this is violated, SPB’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Since you may have already conducted your due diligence on SPB, the undervaluation of the stock may mean it is a good time to top up on your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined above. 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for SPB’s future growth? Take a look at our free research report of analyst consensus for SPB’s outlook.
Past Track Record: Has SPB 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 SPB’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 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.
