Is Tiffany & Co (NYSE:TIF) A Sell At Its Current PE Ratio?

Tiffany & Co (NYSE:TIF) is currently trading at a trailing P/E of 27.4x, which is higher than the industry average of 18.5x. While this makes TIF 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 break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for Tiffany

Breaking down the P/E ratio

The P/E ratio is one of many ratios used in 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.

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 TIF, 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 similar companies should technically have similar P/E ratios, we can very quickly come to some conclusions about the stock if the ratios differ.

Since TIF's P/E of 27.4x is higher than its industry peers (18.5x), it means that investors are paying more than they should for each dollar of TIF's earnings. Therefore, according to this analysis, TIF is an over-priced stock.

Assumptions to watch out for

Before you jump to the conclusion that TIF should be banished from your portfolio, it is important to realise that our conclusion rests on two important assertions. The first is that our peer group actually contains companies that are similar to TIF. 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 TIF, then investors would naturally value TIF at a higher price since it is a less risky investment. Similarly, if you accidentally compared lower growth firms with TIF, investors would also value TIF at a higher price since it is a higher growth investment. Both scenarios would explain why TIF has a higher P/E ratio than its peers. The second assumption that must hold true is that the stocks we are comparing TIF to are fairly valued by the market. If this does not hold, there is a possibility that TIF’s P/E is higher because firms in our peer group are being undervalued by the market.

What this means for you:

You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to TIF. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. 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 TIF’s future growth? Take a look at our free research report of analyst consensus for TIF’s outlook.
2. Past Track Record: Has TIF 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 TIF'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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.