Yahoo Finance Should You Be Tempted To Buy CONSOL Energy Inc (NYSE:CEIX) 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.
CONSOL Energy Inc (NYSE:CEIX) is currently trading at a trailing P/E of 12.4x, which is lower than the industry average of 14.9x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. Today, 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 CONSOL Energy
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 CEIX
Price-Earnings Ratio = Price per share ÷ Earnings per share
CEIX Price-Earnings Ratio = $38.32 ÷ $3.082 = 12.4x
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 CEIX, 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. CEIX’s P/E of 12.4 is lower than its industry peers (14.9), which implies that each dollar of CEIX’s earnings is being undervalued by investors. This multiple is a median of profitable companies of 25 Oil and Gas companies in US including Vanguard Natural Resources, Grupo TMM and PEDEVCO. You can think of it like this: the market is suggesting that CEIX is a weaker business than the average comparable company.
Assumptions to be aware of
Before you jump to conclusions it is important to realise that our assumptions rests on two assertions. Firstly, our peer group contains companies that are similar to CEIX. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with CEIX, 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 CEIX to are fairly valued by the market. If this is violated, CEIX’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Since you may have already conducted your due diligence on CEIX, the undervaluation of the stock may mean it is a good time to top up on your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined 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 CEIX’s future growth? Take a look at our free research report of analyst consensus for CEIX’s outlook.
Financial Health: Are CEIX’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
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.
