Is Cheniere Energy Partners LP’s (NYSEMKT:CQP) PE Ratio A Signal To Sell For Investors?
Cheniere Energy Partners LP (AMEX:CQP) trades with a trailing P/E of 54.8x, which is higher than the industry average of 14.7x. 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. View our latest analysis for Cheniere Energy Partners
Breaking down the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 CQP
Price-Earnings Ratio = Price per share ÷ Earnings per share
CQP Price-Earnings Ratio = $29.84 ÷ $0.545 = 54.8x
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 CQP, 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 CQP’s P/E of 54.8x is higher than its industry peers (14.7x), it means that investors are paying more than they should for each dollar of CQP’s earnings. As such, our analysis shows that CQP represents an over-priced stock.
A few caveats
However, before you rush out to sell your CQP 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 CQP. 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 CQP, 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 CQP to are fairly valued by the market. If this does not hold true, CQP’s lower P/E ratio may be because firms in our peer group are 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 CQP. 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 you are considering investing in CQP, basing your decision on the PE metric at one point in time is certainly not sufficient. I recommend you do additional analysis by looking at its intrinsic valuation and using other relative valuation ratios like PEG or EV/EBITDA.
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 Cheniere Energy Partners 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.
