Yahoo Finance Does Aflac Incorporated’s (NYSE:AFL) PE Ratio Signal A Buying Opportunity?
Aflac Incorporated (NYSE:AFL) is currently trading at a trailing P/E of 7.6x, which is lower than the industry average of 14.4x. While this makes AFL 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 explain what the P/E ratio is as well as what you should look out for when using it. Check out our latest analysis for Aflac
Demystifying the P/E ratio
P/E is a popular ratio used for relative valuation. 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 AFL
Price-Earnings Ratio = Price per share ÷ Earnings per share
AFL Price-Earnings Ratio = $45.43 ÷ $6.016 = 7.6x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to AFL, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. AFL’s P/E of 7.6x is lower than its industry peers (14.4x), which implies that each dollar of AFL’s earnings is being undervalued by investors. As such, our analysis shows that AFL represents an under-priced stock.
Assumptions to watch out for
However, before you rush out to buy AFL, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to AFL. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with AFL, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing AFL to are fairly valued by the market. If this does not hold, there is a possibility that AFL’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to AFL. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. 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 AFL’s future growth? Take a look at our free research report of analyst consensus for AFL’s outlook.
Past Track Record: Has AFL 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 AFL’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.
