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 Boyd Gaming Corporation (NYSE:BYD).
Boyd Gaming Corporation (NYSE:BYD) trades with a trailing P/E of 22.8x, which is lower than the industry average of 22.9x. 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 break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for Boyd Gaming
Breaking down the Price-Earnings ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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.
Price-Earnings Ratio = Price per share ÷ Earnings per share
P/E Calculation for BYD
Price per share = $34.6
Earnings per share = $1.518
∴ Price-Earnings Ratio = $34.6 ÷ $1.518 = 22.8x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Ultimately, our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to BYD, 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.
At 22.8x, BYD’s P/E is lower than its industry peers (22.9x). This implies that investors are undervaluing each dollar of BYD’s earnings. This multiple is a median of profitable companies of 25 Hospitality companies in US including Evolution Technology Resources, U-Swirl and China Enterprises. Therefore, according to this analysis, BYD is an under-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to buy BYD 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 BYD. 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 BYD, then investors would naturally value BYD at a lower price since it is a riskier investment. Similarly, if you accidentally compared higher growth firms with BYD, investors would also value BYD at a lower price since it is a lower growth investment. Both scenarios would explain why BYD has a lower P/E ratio than its peers. The second assumption that must hold true is that the stocks we are comparing BYD to are fairly valued by the market. If this assumption does not hold true, BYD’s lower P/E ratio may be because firms in our peer group are being overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on BYD, the undervaluation of the stock may mean it is a good time to top up on your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined 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 BYD’s future growth? Take a look at our free research report of analyst consensus for BYD’s outlook.
- Past Track Record: Has BYD 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 BYD’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.