Yahoo Finance Should You Be Tempted To Sell Auckland International Airport Limited (NZSE:AIA) At Its Current PE Ratio?
I am writing today to help inform people who are new to the stock market and want to better understand how you can grow your money by investing in Auckland International Airport Limited (NZSE:AIA).
Auckland International Airport Limited (NZSE:AIA) is trading with a trailing P/E of 23.1x, which is higher than the industry average of 0x. While AIA might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for Auckland International Airport
Breaking down the P/E 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 AIA
Price-Earnings Ratio = Price per share ÷ Earnings per share
AIA Price-Earnings Ratio = NZ$6.9 ÷ NZ$0.299 = 23.1x
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 AIA, 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 AIA’s P/E of 23.1x is higher than its industry peers (18x), it means that investors are paying more than they should for each dollar of AIA’s earnings. Therefore, according to this analysis, AIA is an over-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to sell your AIA shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to AIA. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with AIA, 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 AIA to are fairly valued by the market. If this does not hold true, AIA’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 rebalance your portfolio and reduce your holdings in AIA. 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 AIA’s future growth? Take a look at our free research report of analyst consensus for AIA’s outlook.
Past Track Record: Has AIA 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 AIA’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.
