Yahoo Finance Should You Be Tempted To Sell Waste Connections Inc (NYSE:WCN) 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 better understand how you can grow your money by investing in Waste Connections Inc (NYSE:WCN).
Waste Connections Inc (NYSE:WCN) is currently trading at a trailing P/E of 29.4x, which is higher than the industry average of 18.7x. While this makes WCN 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. In this article, 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 Waste Connections
What you need to know about the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 WCN
Price-Earnings Ratio = Price per share ÷ Earnings per share
WCN Price-Earnings Ratio = $76.43 ÷ $2.603 = 29.4x
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 WCN, 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. At 29.4x, WCN’s P/E is higher than its industry peers (18.7x). This implies that investors are overvaluing each dollar of WCN’s earnings. Therefore, according to this analysis, WCN is an over-priced stock.
Assumptions to watch out for
Before you jump to the conclusion that WCN 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 WCN, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with WCN, 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 WCN to are fairly valued by the market. If this is violated, WCN’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 WCN, the overvaluation of the stock may mean it is a good time to reduce 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 highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for WCN’s future growth? Take a look at our free research report of analyst consensus for WCN’s outlook.
Past Track Record: Has WCN 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 WCN’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.
