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 Seacoast Banking Corporation of Florida (NASDAQ:SBCF).
Seacoast Banking Corporation of Florida (NASDAQ:SBCF) is trading with a trailing P/E of 27.8x, which is higher than the industry average of 17.1x. While this makes SBCF 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. See our latest analysis for Seacoast Banking of Florida
What you need to know about the P/E ratio
P/E is often used for relative valuation since earnings power is a chief 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 dollar of the company’s earnings.
Price-Earnings Ratio = Price per share ÷ Earnings per share
P/E Calculation for SBCF
Price per share = $32.99
Earnings per share = $1.186
∴ Price-Earnings Ratio = $32.99 ÷ $1.186 = 27.8x
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. Ultimately, our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to SBCF, such as company lifetime and products sold. 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.
Since SBCF’s P/E of 27.8x is higher than its industry peers (17.1x), it means that investors are paying more than they should for each dollar of SBCF’s earnings. As such, our analysis shows that SBCF represents an over-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to sell your SBCF shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to SBCF. If the companies aren’t similar, the difference in P/E might be a result of other factors. For example, if you accidentally compared lower growth firms with SBCF, then SBCF’s P/E would naturally be higher since investors would reward SBCF’s higher growth with a higher price. Alternatively, if you inadvertently compared riskier firms with SBCF, SBCF’s P/E would again be higher since investors would reward SBCF’s lower risk with a higher price as well. The second assumption that must hold true is that the stocks we are comparing SBCF to are fairly valued by the market. If this assumption is violated, SBCF’s P/E may be higher than its peers because its peers are actually undervalued by investors.
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 SBCF. 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:
- Future Outlook: What are well-informed industry analysts predicting for SBCF’s future growth? Take a look at our free research report of analyst consensus for SBCF’s outlook.
- Past Track Record: Has SBCF 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 SBCF’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.