Yahoo Finance Is Commercial Metals Company (NYSE:CMC) Attractive At Its Current PE Ratio?
The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to learn about the link between company’s fundamentals and stock market performance.
Commercial Metals Company (NYSE:CMC) trades with a trailing P/E of 43.1, which is higher than the industry average of 10.6. While this might not seem positive, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for.
View our latest analysis for Commercial Metals
Demystifying the P/E ratio
The P/E ratio is one of many ratios used in relative valuation. 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 CMC
Price-Earnings Ratio = Price per share ÷ Earnings per share
CMC Price-Earnings Ratio = $20.82 ÷ $0.483 = 43.1x
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. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to CMC, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 43.1, CMC’s P/E is higher than its industry peers (10.6). This implies that investors are overvaluing each dollar of CMC’s earnings. This multiple is a median of profitable companies of 25 Metals and Mining companies in US including North American Potash Developments, Société d’Exploration Minière Vior and Nuinsco Resources. You could think of it like this: the market is pricing CMC as if it is a stronger company than the average of its industry group.
A few caveats
However, you should be aware that this analysis makes certain assumptions. Firstly, that our peer group contains companies that are similar to CMC. If this isn’t the case, the difference in P/E could be due to other factors. For example, if Commercial Metals Company is growing faster than its peers, then it would deserve a higher P/E ratio. We should also be aware that the stocks we are comparing to CMC may not be fairly valued. So while we can reasonably surmise that it is optimistically valued relative to a peer group, it might be fairly valued, if the peer group is undervalued.
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 CMC. 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:
Future Outlook: What are well-informed industry analysts predicting for CMC’s future growth? Take a look at our free research report of analyst consensus for CMC’s outlook.
Past Track Record: Has CMC 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 CMC’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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
