DISH Network Corporation (NASDAQ:DISH) trades with a trailing P/E of 7.4x, which is lower than the industry average of 15.6x. While DISH might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. See our latest analysis for DISH Network
Breaking down the Price-Earnings 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.
P/E Calculation for DISH
Price-Earnings Ratio = Price per share ÷ Earnings per share
DISH Price-Earnings Ratio = $32.98 ÷ $4.483 = 7.4x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as DISH, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 7.4x, DISH’s P/E is lower than its industry peers (15.6x). This implies that investors are undervaluing each dollar of DISH’s earnings. As such, our analysis shows that DISH represents an under-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to buy DISH immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to DISH. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with DISH, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing DISH to are fairly valued by the market. If this is violated, DISH’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Since you may have already conducted your due diligence on DISH, 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: