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Does Informa plc’s (LON:INF) PE Ratio Signal A Selling Opportunity?

This article is intended for those of you who are at the beginning of your investing journey and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.

Informa plc (LON:INF) trades with a trailing P/E of 23x, which is higher than the industry average of 22.6x. While INF 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. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for.

Check out our latest analysis for Informa

Breaking down the P/E ratio

LSE:INF PE PEG Gauge August 21st 18
LSE:INF PE PEG Gauge August 21st 18

A common ratio used for relative valuation is the P/E ratio. 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.

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P/E Calculation for INF

Price-Earnings Ratio = Price per share ÷ Earnings per share

INF Price-Earnings Ratio = £7.79 ÷ £0.339 = 23x

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 INF, 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. INF’s P/E of 23x is higher than its industry peers (22.6x), which implies that each dollar of INF’s earnings is being overvalued by investors. This multiple is a median of profitable companies of 24 Media companies in GB including Catalyst Media Group, NAHL Group and SpaceandPeople. As such, our analysis shows that INF represents an over-priced stock.

A few caveats

However, before you rush out to sell your INF shares, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to INF, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with INF, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing INF to are fairly valued by the market. If this is violated, INF’s P/E may be lower than its peers as they are actually overvalued by investors.

What this means for you:

Since you may have already conducted your due diligence on INF, the overvaluation of the stock may mean it is a good time to reduce 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:

  1. Future Outlook: What are well-informed industry analysts predicting for INF’s future growth? Take a look at our free research report of analyst consensus for INF’s outlook.

  2. Past Track Record: Has INF 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 INF’s historicals for more clarity.

  3. 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.