Apollo Global Management LLC (NYSE:APO) is trading with a trailing P/E of 10.9x, which is lower than the industry average of 16.5x. While this makes APO appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. 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 Apollo Global Management
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 APO
Price per share = $33.47
Earnings per share = $3.057
∴ Price-Earnings Ratio = $33.47 ÷ $3.057 = 10.9x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Ideally, we want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as APO, such as size and country of operation. 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.
Since APO’s P/E of 10.9x is lower than its industry peers (16.5x), it means that investors are paying less than they should for each dollar of APO’s earnings. As such, our analysis shows that APO represents an under-priced stock.
A few caveats
While our conclusion might prompt you to buy APO immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to APO. If the companies aren’t similar, the difference in P/E might be a result of other factors. For example, if you inadvertently compared lower risk firms with APO, then investors would naturally value APO at a lower price since it is a riskier investment. Similarly, if you accidentally compared higher growth firms with APO, investors would also value APO at a lower price since it is a lower growth investment. Both scenarios would explain why APO has a lower P/E ratio than its peers. The second assumption that must hold true is that the stocks we are comparing APO to are fairly valued by the market. If this assumption does not hold true, APO’s lower P/E ratio may be because firms in our peer group are being 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 add more of APO to your portfolio. 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:
1. Financial Health: Is APO’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
2. Past Track Record: Has APO 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 APO’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.