Yahoo Finance Should You Be Tempted To Buy SUPERVALU INC (NYSE:SVU) Because Of Its PE Ratio?
I am writing today to help inform people who are new to the stock market and want to begin learning the link between SUPERVALU INC (NYSE:SVU)’s fundamentals and stock market performance.
SUPERVALU INC (NYSE:SVU) trades with a trailing P/E of 16.6x, which is lower than the industry average of 21.3x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. 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 SUPERVALU
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 SVU
Price-Earnings Ratio = Price per share ÷ Earnings per share
SVU Price-Earnings Ratio = $20.95 ÷ $1.263 = 16.6x
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 SVU, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since SVU’s P/E of 16.6x is lower than its industry peers (21.3x), it means that investors are paying less than they should for each dollar of SVU’s earnings. Therefore, according to this analysis, SVU is an under-priced stock.
Assumptions to watch out for
Before you jump to the conclusion that SVU is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to SVU. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with SVU, 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 SVU to are fairly valued by the market. If this does not hold, there is a possibility that SVU’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 SVU. 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 SVU’s future growth? Take a look at our free research report of analyst consensus for SVU’s outlook.
Past Track Record: Has SVU 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 SVU’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.
