Yahoo Finance Does Nucor Corporation’s (NYSE:NUE) PE Ratio Warrant A Sell?
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 begin learning the link between Nucor Corporation (NYSE:NUE)’s fundamentals and stock market performance.
Nucor Corporation (NYSE:NUE) is trading with a trailing P/E of 16x, which is higher than the industry average of 12.3x. While this makes NUE appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for Nucor
Demystifying the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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 NUE
Price-Earnings Ratio = Price per share ÷ Earnings per share
NUE Price-Earnings Ratio = $65.47 ÷ $4.101 = 16x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to NUE, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. At 16x, NUE’s P/E is higher than its industry peers (12.3x). This implies that investors are overvaluing each dollar of NUE’s earnings. As such, our analysis shows that NUE represents an over-priced stock.
Assumptions to be aware of
However, before you rush out to sell your NUE shares, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to NUE. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with NUE, 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 NUE to are fairly valued by the market. If this does not hold true, NUE’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 rebalance your portfolio and reduce your holdings in NUE. 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 NUE’s future growth? Take a look at our free research report of analyst consensus for NUE’s outlook.
Past Track Record: Has NUE 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 NUE’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.
