Yahoo Finance Is Zumiez Inc (NASDAQ:ZUMZ) Attractive At This PE Ratio?
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 about how to value company based on its current earnings and what are the drawbacks of this method.
Zumiez Inc (NASDAQ:ZUMZ) is currently trading at a trailing P/E of 25.9, which is higher than the industry average of 22.1. Although some investors may see this as unappealing, it is important to understand the assumptions behind the P/E ratio before making judgments. 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.
Check out our latest analysis for Zumiez
Demystifying 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 ZUMZ
Price-Earnings Ratio = Price per share ÷ Earnings per share
ZUMZ Price-Earnings Ratio = $29.95 ÷ $1.158 = 25.9x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to ZUMZ, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 25.9, ZUMZ’s P/E is higher than its industry peers (22.1). This implies that investors are overvaluing each dollar of ZUMZ’s earnings. This multiple is a median of profitable companies of 25 Specialty Retail companies in US including J.Jill, Bed Bath & Beyond and Penske Automotive Group. You could think of it like this: the market is pricing ZUMZ as if it is a stronger company than the average of its industry group.
Assumptions to be aware of
Before you jump to conclusions it is important to realise that there are assumptions in this analysis. The first is that our “similar companies” are actually similar to ZUMZ. If not, the difference in P/E might be a result of other factors. For example, Zumiez Inc could be growing more quickly than the companies we’re comparing it with. In that case it would deserve a higher P/E ratio. Of course, it is possible that the stocks we are comparing with ZUMZ are not fairly valued. So while we can reasonably surmise that it is optimistically valued relative to a peer group, it might be fairly valued, if the peer group is undervalued.
What this means for you:
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 ZUMZ. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned 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 highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for ZUMZ’s future growth? Take a look at our free research report of analyst consensus for ZUMZ’s outlook.
Past Track Record: Has ZUMZ 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 ZUMZ’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.
