Yahoo Finance Should You Be Tempted To Buy Biogen Inc (NASDAQ:BIIB) Because Of Its PE Ratio?
Biogen Inc (NASDAQ:BIIB) is trading with a trailing P/E of 21.9x, which is lower than the industry average of 28.7x. While BIIB 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. 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 Biogen
Breaking down 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 BIIB
Price-Earnings Ratio = Price per share ÷ Earnings per share
BIIB Price-Earnings Ratio = $306.19 ÷ $14.013 = 21.9x
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 BIIB, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 21.9x, BIIB’s P/E is lower than its industry peers (28.7x). This implies that investors are undervaluing each dollar of BIIB’s earnings. As such, our analysis shows that BIIB represents an under-priced stock.
Assumptions to be aware of
However, before you rush out to buy BIIB, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to BIIB. 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 BIIB, 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 BIIB to are fairly valued by the market. If this is violated, BIIB’s P/E may be lower than its peers as they are actually overvalued by investors.
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 BIIB. 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for BIIB’s future growth? Take a look at our free research report of analyst consensus for BIIB’s outlook.
Past Track Record: Has BIIB 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 BIIB’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.
