Is Landmark Infrastructure Partners LP (NASDAQ:LMRK) A Sell At Its Current PE Ratio?

Landmark Infrastructure Partners LP (NASDAQ:LMRK) is currently trading at a trailing P/E of 31.2x, which is higher than the industry average of 10.9x. 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 Landmark Infrastructure Partners

Breaking down the Price-Earnings ratio

NasdaqGM:LMRK PE PEG Gauge Mar 6th 18
NasdaqGM:LMRK PE PEG Gauge Mar 6th 18

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.

Formula

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

P/E Calculation for LMRK

Price per share = $16.5

Earnings per share = $0.53

∴ Price-Earnings Ratio = $16.5 ÷ $0.53 = 31.2x

The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Ultimately, our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to LMRK, 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 LMRK’s P/E of 31.2x is higher than its industry peers (10.9x), it means that investors are paying more than they should for each dollar of LMRK’s earnings. Therefore, according to this analysis, LMRK is an over-priced stock.

A few caveats

While our conclusion might prompt you to sell your LMRK 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 LMRK. If this isn’t the case, the difference in P/E could be due to some other factors. For example, if you inadvertently compared riskier firms with LMRK, then investors would naturally value LMRK at a higher price since it is a less risky investment. Similarly, if you accidentally compared lower growth firms with LMRK, investors would also value LMRK at a higher price since it is a higher growth investment. Both scenarios would explain why LMRK has a higher P/E ratio than its peers. The second assumption that must hold true is that the stocks we are comparing LMRK to are fairly valued by the market. If this assumption does not hold true, LMRK’s higher P/E ratio may be because firms in our peer group are being undervalued by the market.

NasdaqGM:LMRK Future Profit Mar 6th 18
NasdaqGM:LMRK Future Profit Mar 6th 18

What this means for you:

Since you may have already conducted your due diligence on LMRK, the overvaluation of the stock may mean it is a good time to reduce 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:

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