Yahoo Finance Is Suncor Energy Inc (TSE:SU) A Sell At Its Current PE Ratio?
Suncor Energy Inc (TSX:SU) is currently trading at a trailing P/E of 21.9x, which is higher than the industry average of 19.4x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for Suncor Energy
What you need to know about the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for SU
Price-Earnings Ratio = Price per share ÷ Earnings per share
SU Price-Earnings Ratio = CA$51.68 ÷ CA$2.356 = 21.9x
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 SU, 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. SU’s P/E of 21.9x is higher than its industry peers (19.4x), which implies that each dollar of SU’s earnings is being overvalued by investors. As such, our analysis shows that SU represents an over-priced stock.
A few caveats
Before you jump to the conclusion that SU should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to SU, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with SU, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing SU to are fairly valued by the market. If this does not hold, there is a possibility that SU’s P/E is lower because our peer group is 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 SU. 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 highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for SU’s future growth? Take a look at our free research report of analyst consensus for SU’s outlook.
Past Track Record: Has SU 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 SU’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.
