At $56.97, Is The Chemours Company (CC) A Sell?
The Chemours Company (NYSE:CC) is trading with a trailing P/E of 36.6x, which is higher than the industry average of 25.8x. While CC 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 deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. Check out our latest analysis for Chemours
Breaking down the Price-Earnings ratio
P/E is a popular ratio used for relative valuation. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for CC
Price-Earnings Ratio = Price per share ÷ Earnings per share
CC Price-Earnings Ratio = 56.97 ÷ 1.557 = 36.6x
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 CC, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. Since CC’s P/E of 36.6x is higher than its industry peers (25.8x), it means that investors are paying more than they should for each dollar of CC’s earnings. Therefore, according to this analysis, CC is an over-priced stock.
A few caveats
However, before you rush out to sell your CC shares, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to CC. 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 CC, 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 CC to are fairly valued by the market. If this does not hold, there is a possibility that CC’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Are you a shareholder? You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to CC. 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.
Are you a potential investor? If CC has been on your watch list for a while, it is best you also consider its intrinsic valuation. Looking at PE on its own will not give you the full picture of the stock as an investment, so I suggest you should also look at other relative valuation metrics like EV/EBITDA or PEG.
PE is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Chemours for a more in-depth analysis of the stock to help you make a well-informed investment decision. Since we know a limitation of PE is it doesn’t properly account for growth, you can use our free platform to see my list of stocks with a high growth potential and see if their PE is still reasonable.
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.
