Yahoo Finance Should You Be Tempted To Buy Continental Aktiengesellschaft (FRA:CON) Because Of Its PE Ratio?
Continental Aktiengesellschaft (DB:CON) is trading with a trailing P/E of 14.9x, which is lower than the industry average of 15.7x. While CON might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. 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. View our latest analysis for Continental
Breaking down the Price-Earnings ratio
The P/E ratio is one of many ratios used in relative valuation. 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 CON
Price-Earnings Ratio = Price per share ÷ Earnings per share
CON Price-Earnings Ratio = €222 ÷ €14.863 = 14.9x
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. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to CON, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since CON’s P/E of 14.9x is lower than its industry peers (15.7x), it means that investors are paying less than they should for each dollar of CON’s earnings. Therefore, according to this analysis, CON is an under-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to buy CON immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to CON, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with CON, 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 CON to are fairly valued by the market. If this is violated, CON’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to CON. 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:
Future Outlook: What are well-informed industry analysts predicting for CON’s future growth? Take a look at our free research report of analyst consensus for CON’s outlook.
Past Track Record: Has CON 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 CON’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.
