U.S. Markets close in 2 hrs 33 mins
  • S&P 500

    +17.83 (+0.53%)
  • Dow 30

    +71.37 (+0.26%)
  • Nasdaq

    +135.51 (+1.21%)
  • Russell 2000

    +16.00 (+1.06%)
  • Crude Oil

    -1.63 (-4.05%)
  • Gold

    +21.00 (+1.11%)
  • Silver

    +0.77 (+3.26%)

    +0.0022 (+0.1880%)
  • 10-Yr Bond

    +0.0100 (+1.48%)
  • Vix

    +0.16 (+0.61%)

    -0.0022 (-0.1690%)

    +0.1300 (+0.1233%)

    -268.68 (-2.49%)
  • CMC Crypto 200

    -6.85 (-3.06%)
  • FTSE 100

    +13.35 (+0.23%)
  • Nikkei 225

    0.00 (0.00%)

Should You Buy Mesabi Trust (MSB) At This PE Ratio?

Arjun Bhatia

Mesabi Trust (NYSE:MSB) trades with a trailing P/E of 12.7x, which is lower than the industry average of 26.1x. While this makes MSB appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. View our latest analysis for Mesabi Trust

Demystifying the P/E ratio

NYSE:MSB PE PEG Gauge Nov 25th 17
NYSE:MSB PE PEG Gauge Nov 25th 17

P/E is a popular ratio used for 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 MSB

Price-Earnings Ratio = Price per share ÷ Earnings per share

MSB Price-Earnings Ratio = $23.35 ÷ $1.837 = 12.7x

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. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as MSB, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 12.7x, MSB’s P/E is lower than its industry peers (26.1x). This implies that investors are undervaluing each dollar of MSB’s earnings. As such, our analysis shows that MSB represents an under-priced stock.

A few caveats

Before you jump to the conclusion that MSB is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to MSB. 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 MSB, 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 MSB to are fairly valued by the market. If this does not hold, there is a possibility that MSB’s P/E is lower because our peer group is expensive by the market.

What this means for you:

Are you a shareholder? Since you may have already conducted your due diligence on MSB, the undervaluation of the stock may mean it is a good time to top up on your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined above.

Are you a potential investor? If you are considering investing in MSB, looking at the PE ratio on its own is not enough to make a well-informed decision. You will benefit from looking at additional analysis and considering its intrinsic valuation along with other relative valuation metrics like PEG and EV/Sales.

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 Mesabi Trust 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.