John Bean Technologies Corporation (NYSE:JBT) trades with a trailing P/E of 38.4x, which is higher than the industry average of 27.7x. 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. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for John Bean Technologies
Breaking down the Price-Earnings ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for JBT
Price-Earnings Ratio = Price per share ÷ Earnings per share
JBT Price-Earnings Ratio = 101.6 ÷ 2.646 = 38.4x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to JBT, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since JBT's P/E of 38.4x is higher than its industry peers (27.7x), it means that investors are paying more than they should for each dollar of JBT's earnings. Therefore, according to this analysis, JBT is an over-priced stock.
A few caveats
However, before you rush out to sell your JBT shares, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to JBT. 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 JBT, 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 JBT to are fairly valued by the market. If this is violated, JBT's P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Are you a shareholder? Since you may have already conducted your due diligence on JBT, 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.