The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to better understand how you can grow your money by investing in Affiliated Managers Group Inc (NYSE:AMG).
Affiliated Managers Group Inc (NYSE:AMG) is trading with a trailing P/E of 11.3x, which is lower than the industry average of 16x. 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. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View out our latest analysis for Affiliated Managers Group
Demystifying 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.
Price-Earnings Ratio = Price per share ÷ Earnings per share
P/E Calculation for AMG
Price per share = $147.23
Earnings per share = $12.979
∴ Price-Earnings Ratio = $147.23 ÷ $12.979 = 11.3x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to AMG, such as capital structure and profitability. 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.
At 11.3x, AMG’s P/E is lower than its industry peers (16x). This implies that investors are undervaluing each dollar of AMG’s earnings. This multiple is a median of profitable companies of 25 Capital Markets companies in US including Modern Technology, Neon Capital and Oracle Healthcare Acquisition. As such, our analysis shows that AMG represents an under-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to buy AMG 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 AMG. 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 AMG, then investors would naturally value AMG at a lower price since it is a riskier investment. Similarly, if you accidentally compared higher growth firms with AMG, investors would also value AMG at a lower price since it is a lower growth investment. Both scenarios would explain why AMG has a lower P/E ratio than its peers. The second assumption that must hold true is that the stocks we are comparing AMG to are fairly valued by the market. If this assumption does not hold true, AMG’s lower P/E ratio may be because firms in our peer group are being overvalued by the market.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to AMG. 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 urge you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for AMG’s future growth? Take a look at our free research report of analyst consensus for AMG’s outlook.
- Past Track Record: Has AMG 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 AMG’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.
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