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Is Omnicom Group Inc (NYSE:OMC) Attractive At Its Current PE Ratio?

This analysis is intended to introduce important early concepts to people who are starting to invest and want to learn about the link between company’s fundamentals and stock market performance.

Omnicom Group Inc (NYSE:OMC) is trading with a trailing P/E of 13.9, which is higher than the industry average of 10. Although some investors may see this as unappealing, it is important to understand the assumptions behind the P/E ratio before making judgments. In this article, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio.

See our latest analysis for Omnicom Group

What you need to know about the P/E ratio

NYSE:OMC PE PEG Gauge October 16th 18
NYSE:OMC PE PEG Gauge October 16th 18

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.

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P/E Calculation for OMC

Price-Earnings Ratio = Price per share ÷ Earnings per share

OMC Price-Earnings Ratio = $69.5 ÷ $4.983 = 13.9x

The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 OMC, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. OMC’s P/E of 13.9 is higher than its industry peers (10), which implies that each dollar of OMC’s earnings is being overvalued by investors. This multiple is a median of profitable companies of 24 Media companies in US including Cumulus Media, Emmis Communications and Beasley Broadcast Group. You could also say that the market is suggesting that OMC is a stronger business than the average comparable company.

A few caveats

Before you jump to conclusions it is important to realise that there are assumptions in this analysis. Firstly, that our peer group contains companies that are similar to OMC. If this isn’t the case, the difference in P/E could be due to other factors. For example, Omnicom Group Inc could be growing more quickly than the companies we’re comparing it with. In that case it would deserve a higher P/E ratio. We should also be aware that the stocks we are comparing to OMC may not be fairly valued. Thus while we might conclude that it is richly valued relative to its peers, that could be explained by the peer group being undervalued.

What this means for you:

You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to OMC. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. 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:

  1. Future Outlook: What are well-informed industry analysts predicting for OMC’s future growth? Take a look at our free research report of analyst consensus for OMC’s outlook.

  2. Past Track Record: Has OMC 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 OMC’s historicals for more clarity.

  3. 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.