Does Lundin Mining Corporation’s (TSE:LUN) PE Ratio Signal A Selling Opportunity?
Lundin Mining Corporation (TSX:LUN) trades with a trailing P/E of 11.4x, which is higher than the industry average of 11.2x. 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. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for Lundin Mining
Demystifying the P/E 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 LUN
Price-Earnings Ratio = Price per share ÷ Earnings per share
LUN Price-Earnings Ratio = $6.2 ÷ $0.543 = 11.4x
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. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to LUN, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. LUN’s P/E of 11.4x is higher than its industry peers (11.2x), which implies that each dollar of LUN’s earnings is being overvalued by investors. As such, our analysis shows that LUN represents an over-priced stock.
A few caveats
While our conclusion might prompt you to sell your LUN shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to LUN, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with LUN, 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 LUN to are fairly valued by the market. If this does not hold, there is a possibility that LUN’s P/E is lower because our peer group is 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 LUN. 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 highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for LUN’s future growth? Take a look at our free research report of analyst consensus for LUN’s outlook.
Past Track Record: Has LUN 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 LUN’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.
