Yahoo Finance Does FleetCor Technologies Inc’s (NYSE:FLT) PE Ratio Warrant A Buy?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.
FleetCor Technologies Inc (NYSE:FLT) trades with a trailing P/E of 22.9x, which is lower than the industry average of 26.6x. While this makes FLT appear like a great stock to buy, 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.
View our latest analysis for FleetCor Technologies
Demystifying the P/E ratio
The P/E ratio is one of many ratios used in relative valuation. 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 FLT
Price-Earnings Ratio = Price per share ÷ Earnings per share
FLT Price-Earnings Ratio = $213.74 ÷ $9.321 = 22.9x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful 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 FLT, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. FLT’s P/E of 22.9 is lower than its industry peers (26.6), which implies that each dollar of FLT’s earnings is being undervalued by investors. This multiple is a median of profitable companies of 25 IT companies in US including e-Synergies, Spotlight Homes and Steel Connect. You can think of it like this: the market is suggesting that FLT is a weaker business than the average comparable company.
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 FLT, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with FLT, 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 FLT to are fairly valued by the market. If this does not hold true, FLT’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
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 add more of FLT to your portfolio. 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for FLT’s future growth? Take a look at our free research report of analyst consensus for FLT’s outlook.
Past Track Record: Has FLT 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 FLT’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.
