Yahoo Finance Is Sports Direct International plc (LON:SPD) A Sell 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 Sports Direct International plc (LON:SPD).
Sports Direct International plc (LON:SPD) trades with a trailing P/E of 13.6x, which is higher than the industry average of 12.8x. While this makes SPD appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View out our latest analysis for Sports Direct International
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. 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 SPD
Price-Earnings Ratio = Price per share ÷ Earnings per share
SPD Price-Earnings Ratio = £4.01 ÷ £0.295 = 13.6x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to SPD, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. SPD’s P/E of 13.6x is higher than its industry peers (12.8x), which implies that each dollar of SPD’s earnings is being overvalued by investors. Therefore, according to this analysis, SPD is an over-priced stock.
A few caveats
Before you jump to the conclusion that SPD should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to SPD. 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 SPD, 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 SPD to are fairly valued by the market. If this does not hold, there is a possibility that SPD’s P/E is lower because our peer group is 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 SPD. 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 SPD’s future growth? Take a look at our free research report of analyst consensus for SPD’s outlook.
Past Track Record: Has SPD 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 SPD’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.
