Which Stock is the Most Overpriced?

The P/E ratio is used to measure the reasonableness of a stock's price. (P/E is short for price-earnings ratio. It is an indicator of the amount of earnings a company is expected to generate, compared to the current stock price.) A P/E of 16-24 is considered reasonable. A lower number means the stock is undervalued; a higher number, overvalued.

Here is a list of CAD vendors, and their current P/E. Whose stock is the most overvalued? The answer may surprise:

Under Valued

11.1 - INTERGRAPH

Just Right

18.5 - PARAMETRIC TECH
23.4 - MOLDFLOW

Over Valued

28.5 - DASSAULT SYSTEMES
29.6 - ANSYS
37.8 - AUTODESK
52.1 - CADENCE DESIGN
54.5 - INTL MICROCOMPUTER

(Google is causing jaws to drop with its current P/E of 116.)

Comments

[Rob]

PE is a rough guide at best. It doesn't take into account a number of issues that can impact stock price the biggest of which is future expectations and percieved risks to the company.

Two companies earning the same profits, one that is selling old technology is isn't adapting to change vs one that has the latest killer app will have different stock prices and therefore PE ratios. You just have to ask yourself, "what is it that justifies the higher price?"

It's only when you have very comparable companies that PE helps much, geography, target market, size.

[Brad Holtz]

Rob's comment is correct, but incomplete. There are other, structural issues that affect P/E ratios. The most obvious of these are how much debt the companies are carrying; The ratio of debt to cash flow; cash-on-hand (liquid assets); market share dynamics; and overall growth of the market.

[LH]

And Brad's post is yet also incomplete. The price of a security is as much a function of human nature as anything else. That said, the pricing models in wide use today are all well documented and freely available; and are mainly sensitive to revenue growth and margin, given other things seem normal.

It ain't rocket science (literally, eh?).