Manning & Napier Inc (NYSE:MN) is trading with a trailing P/E of 7.8x, which is lower than the industry average of 17.7x. While MN might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. 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 Manning & Napier
Demystifying 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 MN
Price-Earnings Ratio = Price per share ÷ Earnings per share
MN Price-Earnings Ratio = $3.75 ÷ $0.478 = 7.8x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as MN, 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. MN’s P/E of 7.8x is lower than its industry peers (17.7x), which implies that each dollar of MN’s earnings is being undervalued by investors. Therefore, according to this analysis, MN is an under-priced stock.
Assumptions to watch out for
However, before you rush out to buy MN, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to MN. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with MN, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing MN to are fairly valued by the market. If this does not hold, there is a possibility that MN’s P/E is lower because our peer group is overvalued by the market.
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.