Yahoo Finance Should You Be Tempted To Buy The Children’s Place Inc (PLCE) At Its Current Price?
The Children's Place Inc (NASDAQ:PLCE) trades with a trailing P/E of 15.5x, which is lower than the industry average of 19.8x. While this makes PLCE appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for PLCE
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. 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.
Formula
Price-Earnings Ratio = Price per share ÷ Earnings per share
P/E Calculation for PLCE
Price per share = 111.85
Earnings per share = 7.196
∴ Price-Earnings Ratio = 111.85 ÷ 7.196 = 15.5x
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 PLCE, 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. 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.
Since PLCE's P/E of 15.5x is lower than its industry peers (19.8x), it means that investors are paying less than they should for each dollar of PLCE's earnings. As such, our analysis shows that PLCE represents an under-priced stock.
A few caveats
However, before you rush out to buy PLCE, it is important to note that this conclusion is based on two key assumptions. The first is that our peer group actually contains companies that are similar to PLCE. If this isn’t the case, the difference in P/E could be due to some other factors. For example, if you inadvertently compared lower risk firms with PLCE, then investors would naturally value PLCE at a lower price since it is a riskier investment. Similarly, if you accidentally compared higher growth firms with PLCE, investors would also value PLCE at a lower price since it is a lower growth investment. Both scenarios would explain why PLCE has a lower P/E ratio than its peers. The second assumption that must hold true is that the stocks we are comparing PLCE to are fairly valued by the market. If this does not hold, there is a possibility that PLCE’s P/E is lower because firms in our peer group are being overvalued by the market.
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 PLCE 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 PLCE, basing your decision on the PE metric at one point in time is certainly not sufficient. I recommend you do additional analysis by looking at its intrinsic valuation and using other relative valuation ratios like PEG or EV/EBITDA.
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 Children's Place 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.
