Silgan Holdings Inc (NASDAQ:SLGN) is trading with a trailing P/E of 10.5x, which is lower than the industry average of 18.8x. While this makes SLGN 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 deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. View our latest analysis for Silgan Holdings
Breaking down the P/E ratio
The P/E ratio is one of many ratios used in 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 SLGN
Price-Earnings Ratio = Price per share ÷ Earnings per share
SLGN Price-Earnings Ratio = $27.89 ÷ $2.646 = 10.5x
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 SLGN, 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 SLGN’s P/E of 10.5x is lower than its industry peers (18.8x), it means that investors are paying less than they should for each dollar of SLGN’s earnings. Therefore, according to this analysis, SLGN is an under-priced stock.
Assumptions to be aware of
However, before you rush out to buy SLGN, 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 SLGN, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with SLGN, 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 SLGN to are fairly valued by the market. If this does not hold, there is a possibility that SLGN’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on SLGN, the undervaluation of the stock may mean it is a good time to top up on your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined 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 SLGN’s future growth? Take a look at our free research report of analyst consensus for SLGN’s outlook.
- Past Track Record: Has SLGN 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 SLGN’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.