Bath & Body Works shares fell by -1.8% during the day's afternoon session, and are now trading at a price of $40.98. Is it time to buy the dip? To better answer that question, it's essential to check if the market is valuing the company's shares fairly.
Bath & Body Works, Inc. operates a specialty retailer of home fragrance, body care, and soaps and sanitizer products. The company belongs to the Consumer Cyclical sector, which has an average price to earnings (P/E) ratio of 24.11. In contrast, Bath & Body Works has a trailing 12 month P/E ratio of 7.1 based on its earnings per share of $None.
There is an important limit on the usefulness of P/E ratios. Since the P/E ratio is the share price divided by earnings per share, the ratio is determined partially by market sentiment on the stock. Sometimes a negative sentiment translates to a lower market price and therefore a lower P/E ratio -- and there might be good reasons for this negative sentiment.
One of the main reasons not to blindly invest in a company with a low P/E ratio is that it might have low growth expectations. Low growth correlates with low stock performance, so it's useful to factor growth into the valuation process. One of the easiest ways to do this is to divide the company's P/E ratio by its expected growth rate, which results in the price to earnings growth, or PEG ratio.
When we do this for Bath & Body Works, we obtain a PEG ratio of 1.14, which tells us the company is fairly valued in terms of growth. PEG ratios under 1 are considered an indicator of undervalued growth, but we need to keep in mind that many successful companys with excellent share performance have maintained much higher PEG ratios.
As always, a quantitave approach to a stock should be supplemented with a look at qualitative factors, such as the competence of its management team, quality of its corporate culture, and the wide variety of social and economic factors that can impact the success of its product.
