Yahoo Finance Is Thales SA (EPA:HO) Attractive At Its Current PE Ratio?
I am writing today to help inform people who are new to the stock market and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.
Thales SA (EPA:HO) is currently trading at a trailing P/E of 24.9x, which is lower than the industry average of 25.7x. While this makes HO 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 explain what the P/E ratio is as well as what you should look out for when using it.
See our latest analysis for Thales
Breaking down the Price-Earnings ratio
P/E is a popular ratio used for relative valuation. 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 HO
Price-Earnings Ratio = Price per share ÷ Earnings per share
HO Price-Earnings Ratio = €115.15 ÷ €4.62 = 24.9x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to HO, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. Since HO’s P/E of 24.9x is lower than its industry peers (25.7x), it means that investors are paying less than they should for each dollar of HO’s earnings. This multiple is a median of profitable companies of 10 Aerospace & Defense companies in FR including Safran, Figeac Aero Société Anonyme and Lisi. Therefore, according to this analysis, HO is an under-priced stock.
Assumptions to watch out for
However, before you rush out to buy HO, 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 HO, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with HO, 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 HO to are fairly valued by the market. If this does not hold, there is a possibility that HO’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 HO. 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 HO’s future growth? Take a look at our free research report of analyst consensus for HO’s outlook.
Past Track Record: Has HO 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 HO’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 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.
