Yahoo Finance Does L Brands Inc’s (NYSE:LB) PE Ratio Signal A Buying Opportunity?
This article is intended for those of you who are at the beginning of your investing journey and want to begin learning the link between L Brands Inc (NYSE:LB)’s fundamentals and stock market performance.
L Brands Inc (NYSE:LB) trades with a trailing P/E of 11.1x, which is lower than the industry average of 20.7x. While this makes LB 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 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 L Brands
Demystifying the P/E ratio
P/E is a popular ratio used for 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 LB
Price-Earnings Ratio = Price per share ÷ Earnings per share
LB Price-Earnings Ratio = $36.69 ÷ $3.32 = 11.1x
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 LB, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. Since LB’s P/E of 11.1x is lower than its industry peers (20.7x), it means that investors are paying less than they should for each dollar of LB’s earnings. Therefore, according to this analysis, LB is an under-priced stock.
A few caveats
While our conclusion might prompt you to buy LB immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to LB, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with LB, 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 LB to are fairly valued by the market. If this does not hold, there is a possibility that LB’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on LB, 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 highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for LB’s future growth? Take a look at our free research report of analyst consensus for LB’s outlook.
Past Track Record: Has LB 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 LB’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.
