Yahoo Finance Is Coca-Cola HBC AG (LON:CCH) A Sell At Its Current PE Ratio?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between Coca-Cola HBC AG (LON:CCH)’s fundamentals and stock market performance.
Coca-Cola HBC AG (LON:CCH) is currently trading at a trailing P/E of 25.6x, which is higher than the industry average of 24.6x. While CCH might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. 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 Coca-Cola HBC
Demystifying 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 CCH
Price-Earnings Ratio = Price per share ÷ Earnings per share
CCH Price-Earnings Ratio = €29.87 ÷ €1.168 = 25.6x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as CCH, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 25.6x, CCH’s P/E is higher than its industry peers (24.6x). This implies that investors are overvaluing each dollar of CCH’s earnings. As such, our analysis shows that CCH represents an over-priced stock.
Assumptions to watch out for
However, before you rush out to sell your CCH shares, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to CCH, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with CCH, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing CCH to are fairly valued by the market. If this is violated, CCH’s P/E may be lower than its peers as they are actually overvalued by investors.
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 CCH. 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 CCH’s future growth? Take a look at our free research report of analyst consensus for CCH’s outlook.
Past Track Record: Has CCH 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 CCH’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.
