Yahoo Finance Should You Be Tempted To Buy Wacker Neuson SE (FRA:WAC) Because Of Its PE Ratio?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to learn about the link between company’s fundamentals and stock market performance.
Wacker Neuson SE (FRA:WAC) is trading with a trailing P/E of 11.1x, which is lower than the industry average of 17.9x. While WAC 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.
See our latest analysis for Wacker Neuson
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 WAC
Price-Earnings Ratio = Price per share ÷ Earnings per share
WAC Price-Earnings Ratio = €22.06 ÷ €1.987 = 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 WAC, 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 11.1, WAC’s P/E is lower than its industry peers (17.9). This implies that investors are undervaluing each dollar of WAC’s earnings. This multiple is a median of profitable companies of 25 Machinery companies in DE including Componenta, STS Group and STS Group. You can think of it like this: the market is suggesting that WAC is a weaker business than the average comparable company.
A few caveats
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 WAC. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with WAC, 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 WAC to are fairly valued by the market. If this does not hold true, WAC’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
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 add more of WAC to your portfolio. 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for WAC’s future growth? Take a look at our free research report of analyst consensus for WAC’s outlook.
Past Track Record: Has WAC 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 WAC’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 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.
