January 21, 2022

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Despite Its High P/E Ratio, Is TransUnion (NYSE:TRU) Still Undervalued?

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at TransUnion’s (NYSE:TRU) P/E ratio and reflect on what it tells us about the company’s share price. What is TransUnion’s P/E ratio? Well, based on the last twelve months it is 35.15. In other words, at today’s prices, investors are paying $35.15 for every $1 in prior year profit.

Check out our latest analysis for TransUnion

How Do I Calculate TransUnion’s Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for TransUnion:

P/E of 35.15 = $65.790 ÷ $1.872 (Based on the year to December 2019.)

(Note: the above calculation results may not be precise due to rounding.)

Is A High Price-to-Earnings Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. All else being equal, it’s better to pay a low price — but as Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price’.

Does TransUnion Have A Relatively High Or Low P/E For Its Industry?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that TransUnion has a higher P/E than the average (13.6) P/E for companies in the professional services industry.

NYSE:TRU Price Estimation Relative to Market, March 17th 2020

Its relatively high P/E ratio indicates that TransUnion shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.

It’s great to see that TransUnion grew EPS by 24% in the last year. And its annual EPS growth rate over 3 years is 42%. So one might expect an above average P/E ratio.

Remember: P/E Ratios Don’t Consider The Balance Sheet

The ‘Price’ in P/E reflects the market capitalization of the company. That means it doesn’t take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

So What Does TransUnion’s Balance Sheet Tell Us?

Net debt is 27% of TransUnion’s market cap. You’d want to be aware of this fact, but it doesn’t bother us.

The Bottom Line On TransUnion’s P/E Ratio

TransUnion has a P/E of 35.2. That’s higher than the average in its market, which is 12.7. The company is not overly constrained by its modest debt levels, and its recent EPS growth very solid. So on this analysis it seems reasonable that its P/E ratio is above average.

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

Of course you might be able to find a better stock than TransUnion. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you spot an error that warrants correction, please contact the editor at [email protected] This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.

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