Is Mettler-Toledo International Inc (NYSE:MTD) Attractive At Its Current PE Ratio?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to learn about the link between company’s fundamentals and stock market performance.
Mettler-Toledo International Inc (NYSE:MTD) is trading with a trailing P/E of 39.8x, which is lower than the industry average of 48.5x. While MTD might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, 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 Mettler-Toledo International
Breaking down the P/E ratio
The P/E ratio is one of many ratios used in 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 MTD
Price-Earnings Ratio = Price per share ÷ Earnings per share
MTD Price-Earnings Ratio = $603.98 ÷ $15.174 = 39.8x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to MTD, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. MTD’s P/E of 39.8 is lower than its industry peers (48.5), which implies that each dollar of MTD’s earnings is being undervalued by investors. This multiple is a median of profitable companies of 18 Life Sciences companies in US including Bio-Rad Laboratories, BIOQUAL and Cambrex. One could put it like this: the market is pricing MTD as if it is a weaker company than the average company in its industry.
A few caveats
However, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to MTD. 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 MTD, 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 MTD to are fairly valued by the market. If this is violated, MTD’s P/E may be lower than its peers as they are actually overvalued by investors.
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 MTD. 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for MTD’s future growth? Take a look at our free research report of analyst consensus for MTD’s outlook.
Past Track Record: Has MTD 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 MTD’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.
