Should You Be Tempted To Sell Thor Industries Inc (NYSE:THO) Because Of Its PE Ratio?

Thor Industries Inc (NYSE:THO) trades with a trailing P/E of 14.3x, which is higher than the industry average of 10.3x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View our latest analysis for Thor Industries

What you need to know about the P/E ratio

NYSE:THO PE PEG Gauge Mar 22nd 18
NYSE:THO PE PEG Gauge Mar 22nd 18

A common ratio used for relative valuation is the P/E ratio. 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.

Formula

Price-Earnings Ratio = Price per share ÷ Earnings per share

P/E Calculation for THO

Price per share = $119.66

Earnings per share = $8.341

∴ Price-Earnings Ratio = $119.66 ÷ $8.341 = 14.3x

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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to THO, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use below. 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 14.3x, THO’s P/E is higher than its industry peers (10.3x). This implies that investors are overvaluing each dollar of THO’s earnings. As such, our analysis shows that THO represents an over-priced stock.

A few caveats

While our conclusion might prompt you to sell your THO shares immediately, there are two important assumptions you should be aware of. The first is that our peer group actually contains companies that are similar to THO. If this isn’t the case, the difference in P/E could be due to some other factors. For example, if you accidentally compared lower growth firms with THO, then THO’s P/E would naturally be higher since investors would reward THO’s higher growth with a higher price. Alternatively, if you inadvertently compared riskier firms with THO, THO’s P/E would again be higher since investors would reward THO’s lower risk with a higher price as well. The second assumption that must hold true is that the stocks we are comparing THO to are fairly valued by the market. If this assumption is violated, THO’s P/E may be higher than its peers because its peers are actually undervalued by investors.

NYSE:THO Future Profit Mar 22nd 18
NYSE:THO Future Profit Mar 22nd 18

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 THO. 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 highly recommend you to complete your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for THO’s future growth? Take a look at our free research report of analyst consensus for THO’s outlook.
  2. Past Track Record: Has THO 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 THO’s historicals for more clarity.
  3. 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.