Yahoo Finance Does BHP Billiton plc’s (LON:BLT) PE Ratio Signal A Selling Opportunity?
BHP Billiton plc (LSE:BLT) trades with a trailing P/E of 26x, which is higher than the industry average of 12.6x. While BLT might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, 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 BHP Billiton
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. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each pound of the company’s earnings.
P/E Calculation for BLT
Price-Earnings Ratio = Price per share ÷ Earnings per share
BLT Price-Earnings Ratio = $22.98 ÷ $0.883 = 26x
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 BLT, 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. At 26x, BLT’s P/E is higher than its industry peers (12.6x). This implies that investors are overvaluing each dollar of BLT’s earnings. As such, our analysis shows that BLT represents an over-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to sell your BLT shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to BLT, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with BLT, 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 BLT to are fairly valued by the market. If this does not hold, there is a possibility that BLT’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
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 BLT. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned 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 BLT’s future growth? Take a look at our free research report of analyst consensus for BLT’s outlook.
Past Track Record: Has BLT 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 BLT’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.
