Is BCE Inc’s (TSE:BCE) PE Ratio A Signal To Sell For Investors?
BCE Inc (TSX:BCE) is currently trading at a trailing P/E of 17.3x, which is higher than the industry average of 16.9x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. Check out our latest analysis for BCE
Breaking down the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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 BCE
Price-Earnings Ratio = Price per share ÷ Earnings per share
BCE Price-Earnings Ratio = CA$53.84 ÷ CA$3.115 = 17.3x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 BCE, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. BCE’s P/E of 17.3x is higher than its industry peers (16.9x), which implies that each dollar of BCE’s earnings is being overvalued by investors. As such, our analysis shows that BCE represents an over-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to sell your BCE shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to BCE, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with BCE, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing BCE to are fairly valued by the market. If this does not hold true, BCE’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 rebalance your portfolio and reduce your holdings in BCE. 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 BCE’s future growth? Take a look at our free research report of analyst consensus for BCE’s outlook.
Past Track Record: Has BCE 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 BCE’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.
