This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in AllianceBernstein Holding LP (NYSE:AB).
AllianceBernstein Holding LP (NYSE:AB) is trading with a trailing P/E of 12.2x, which is lower than the industry average of 16x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. Check out our latest analysis for AllianceBernstein Holding
Breaking down the P/E ratio
P/E is a popular ratio used for relative valuation. 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 dollar of the company’s earnings.
Price-Earnings Ratio = Price per share ÷ Earnings per share
P/E Calculation for AB
Price per share = $28.5
Earnings per share = $2.335
∴ Price-Earnings Ratio = $28.5 ÷ $2.335 = 12.2x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to AB, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since it is expected that similar companies have similar P/E ratios, we can come to some conclusions about the stock if the ratios are different.
At 12.2x, AB’s P/E is lower than its industry peers (16x). This implies that investors are undervaluing each dollar of AB’s earnings. This multiple is a median of profitable companies of 25 Capital Markets companies in US including Modern Technology, Neon Capital and Oracle Healthcare Acquisition. Therefore, according to this analysis, AB is an under-priced stock.
A few caveats
However, before you rush out to buy AB, it is important to note that this conclusion is based on two key assumptions. The first is that our peer group actually contains companies that are similar to AB. If this isn’t the case, the difference in P/E could be due to some other factors. For example, if you inadvertently compared lower risk firms with AB, then investors would naturally value AB at a lower price since it is a riskier investment. Similarly, if you accidentally compared higher growth firms with AB, investors would also value AB at a lower price since it is a lower growth investment. Both scenarios would explain why AB has a lower P/E ratio than its peers. The second assumption that must hold true is that the stocks we are comparing AB to are fairly valued by the market. If this assumption is violated, AB’s P/E may be lower than its peers because its peers are actually overvalued by investors.
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 AB. 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 highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for AB’s future growth? Take a look at our free research report of analyst consensus for AB’s outlook.
- Past Track Record: Has AB 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 AB’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.