What Does MAXIMUS Inc’s (NYSE:MMS) PE Ratio Tell You?
The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to begin learning about how to value company based on its current earnings and what are the drawbacks of this method.
MAXIMUS Inc (NYSE:MMS) is trading with a trailing P/E of 19.2x, which is lower than the industry average of 26.6x. While this makes MMS 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 deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio.
See our latest analysis for MAXIMUS
Demystifying 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 MMS
Price-Earnings Ratio = Price per share ÷ Earnings per share
MMS Price-Earnings Ratio = $66.5 ÷ $3.465 = 19.2x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to MMS, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 19.2, MMS’s P/E is lower than its industry peers (26.6). This implies that investors are undervaluing each dollar of MMS’s earnings. This multiple is a median of profitable companies of 24 IT companies in US including e-Synergies, Spotlight Homes and Steel Connect. One could put it like this: the market is pricing MMS as if it is a weaker company than the average company in its industry.
Assumptions to be aware of
However, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to MMS. 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 MMS, 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 MMS to are fairly valued by the market. If this does not hold, there is a possibility that MMS’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to MMS. 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. 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 MMS’s future growth? Take a look at our free research report of analyst consensus for MMS’s outlook.
Past Track Record: Has MMS 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 MMS’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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
