FNB Corporation (NYSE:FNB) trades with a trailing P/E of 17.9x, which is higher than the industry average of 16.9x. While this makes FNB appear like a stock to avoid or sell if you own it, 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. View our latest analysis for F.N.B
Breaking down the P/E 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 FNB
Price-Earnings Ratio = Price per share ÷ Earnings per share
FNB Price-Earnings Ratio = $14.27 ÷ $0.797 = 17.9x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as FNB, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since FNB’s P/E of 17.9x is higher than its industry peers (16.9x), it means that investors are paying more than they should for each dollar of FNB’s earnings. Therefore, according to this analysis, FNB is an over-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that FNB should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to FNB. 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 FNB, 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 FNB to are fairly valued by the market. If this is violated, FNB’s P/E may be lower than its peers as they are actually overvalued by investors.
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 rebalance your portfolio and reduce your holdings in FNB. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above.