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Marriott International Inc (NASDAQ:MAR) is trading with a trailing P/E of 36.7x, which is higher than the industry average of 22.5x. While this makes MAR 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. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. Check out our latest analysis for Marriott International
What you need to know about the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key 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 MAR
Price-Earnings Ratio = Price per share ÷ Earnings per share
MAR Price-Earnings Ratio = $139.31 ÷ $3.796 = 36.7x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as MAR, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 36.7x, MAR’s P/E is higher than its industry peers (22.5x). This implies that investors are overvaluing each dollar of MAR’s earnings. As such, our analysis shows that MAR represents an over-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to sell your MAR shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to MAR. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with MAR, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing MAR to are fairly valued by the market. If this does not hold, there is a possibility that MAR’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to rebalance your portfolio and reduce your holdings in MAR. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned 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: