Does Lagardère SCA’s (EPA:MMB) PE Ratio Signal A Selling Opportunity?
Lagardère SCA (ENXTPA:MMB) is currently trading at a trailing P/E of 16.8x, which is higher than the industry average of 16x. While MMB 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 break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for Lagardère
Breaking down the Price-Earnings ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. 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 MMB
Price-Earnings Ratio = Price per share ÷ Earnings per share
MMB Price-Earnings Ratio = €23.18 ÷ €1.384 = 16.8x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to MMB, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since MMB’s P/E of 16.8x is higher than its industry peers (16x), it means that investors are paying more than they should for each dollar of MMB’s earnings. Therefore, according to this analysis, MMB is an over-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that MMB should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to MMB. 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 MMB, 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 MMB to are fairly valued by the market. If this does not hold, there is a possibility that MMB’s P/E is lower because our peer group is overvalued by the market.
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.
