Yahoo Finance Should You Buy Oshkosh Corporation (OSK) At This PE Ratio?
Oshkosh Corporation (NYSE:OSK) is currently trading at a trailing P/E of 21.8x, which is lower than the industry average of 25.9x. While OSK might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. 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 OSK
What you need to know about the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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.
Formula
Price-Earnings Ratio = Price per share ÷ Earnings per share
P/E Calculation for OSK
Price per share = 74.45
Earnings per share = 3.41
∴ Price-Earnings Ratio = 74.45 ÷ 3.41 = 21.8x
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 OSK, 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. Since it is expected that similar companies have similar P/E ratios, we can come to some conclusions about the stock if the ratios are different.
At 21.8x, OSK’s P/E is lower than its industry peers (25.9x). This implies that investors are undervaluing each dollar of OSK’s earnings. As such, our analysis shows that OSK represents an under-priced stock.
A few caveats
Before you jump to the conclusion that OSK represents the perfect buying opportunity, it is important to realise that our conclusion rests on two important assertions. The first is that our “similar companies” are actually similar to OSK. If the companies aren’t similar, the difference in P/E might be a result of other factors. For example, if you inadvertently compared lower risk firms with OSK, then investors would naturally value OSK at a lower price since it is a riskier investment. Similarly, if you accidentally compared higher growth firms with OSK, investors would also value OSK at a lower price since it is a lower growth investment. Both scenarios would explain why OSK has a lower P/E ratio than its peers. The second assumption that must hold true is that the stocks we are comparing OSK to are fairly valued by the market. If this assumption is violated, OSK's P/E may be lower than its peers because its peers are actually overvalued by investors.
What this means for you:
Are you a shareholder? 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 OSK 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.
Are you a potential investor? If you are considering investing in OSK, looking at the PE ratio on its own is not enough to make a well-informed decision. You will benefit from looking at additional analysis and considering its intrinsic valuation along with other relative valuation metrics like PEG and EV/Sales.
PE is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Oshkosh for a more in-depth analysis of the stock to help you make a well-informed investment decision. Since we know a limitation of PE is it doesn't properly account for growth, you can use our free platform to see my list of stocks with a high growth potential and see if their PE is still reasonable.
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.
