This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in L3 Technologies Inc (NYSE:LLL).
L3 Technologies Inc (NYSE:LLL) is trading with a trailing P/E of 19.2x, which is lower than the industry average of 22.2x. While LLL 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. In this article, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. Check out our latest analysis for L3 Technologies
Breaking down the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 LLL
Price-Earnings Ratio = Price per share ÷ Earnings per share
LLL Price-Earnings Ratio = $193.63 ÷ $10.074 = 19.2x
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. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to LLL, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 19.2x, LLL’s P/E is lower than its industry peers (22.2x). This implies that investors are undervaluing each dollar of LLL’s earnings. As such, our analysis shows that LLL represents an under-priced stock.
A few caveats
However, before you rush out to buy LLL, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to LLL, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with LLL, 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 LLL to are fairly valued by the market. If this does not hold true, LLL’s lower P/E ratio may be because firms in our peer group are 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 add more of LLL to your portfolio. 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 highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for LLL’s future growth? Take a look at our free research report of analyst consensus for LLL’s outlook.
Past Track Record: Has LLL 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 LLL’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.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.