Yahoo Finance Should You Be Tempted To Buy Meggitt PLC (LON:MGGT) Because Of Its PE Ratio?
I am writing today to help inform people who are new to the stock market and want to begin learning the link between Meggitt PLC (LON:MGGT)’s fundamentals and stock market performance.
Meggitt PLC (LON:MGGT) is trading with a trailing P/E of 11.1x, which is lower than the industry average of 21.3x. While this makes MGGT appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for Meggitt
Breaking down the Price-Earnings 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 MGGT
Price-Earnings Ratio = Price per share ÷ Earnings per share
MGGT Price-Earnings Ratio = £5.02 ÷ £0.452 = 11.1x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as MGGT, 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. Since MGGT’s P/E of 11.1x is lower than its industry peers (21.3x), it means that investors are paying less than they should for each dollar of MGGT’s earnings. As such, our analysis shows that MGGT represents an under-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to buy MGGT immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to MGGT. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with MGGT, 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 MGGT to are fairly valued by the market. If this does not hold, there is a possibility that MGGT’s P/E is lower because our peer group is overvalued by the market.
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 MGGT. 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 MGGT’s future growth? Take a look at our free research report of analyst consensus for MGGT’s outlook.
Past Track Record: Has MGGT 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 MGGT’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.
