Is MYR Group Inc (NASDAQ:MYRG) Attractive At This PE Ratio?
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.
MYR Group Inc (NASDAQ:MYRG) trades on a trailing P/E of 18.2. This isn’t too far from the industry average (which is 18.6). Although some investors may jump to the conclusion that this is a great buying opportunity, 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.
See our latest analysis for MYR Group
What you need to know about the P/E ratio
P/E is a popular ratio used for 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 MYRG
Price-Earnings Ratio = Price per share ÷ Earnings per share
MYRG Price-Earnings Ratio = $34.76 ÷ $1.909 = 18.2x
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 MYRG, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. MYR Group Inc (NASDAQ:MYRG) trades on a trailing P/E of 18.2. This isn’t too far from the industry average (which is 18.6). This multiple is a median of profitable companies of 24 Construction companies in US including Telidyne, Baran Group and KBR. You can think of it like this: the market is suggesting that MYRG has similar prospects to its peers in the same industry.
A few caveats
However, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to MYRG. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with MYRG, 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 MYRG to are fairly valued by the market. If this does not hold, there is a possibility that MYRG’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on MYRG, the undervaluation of the stock may mean it is a good time to top up on your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined 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 MYRG’s future growth? Take a look at our free research report of analyst consensus for MYRG’s outlook.
Past Track Record: Has MYRG 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 MYRG’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.
