Is Rogers Communications Inc (TSX:RCIB) A Sell At Its Current Price?
Rogers Communications Inc (TSX:RCI.B) trades with a trailing P/E of 32x, which is higher than the industry average of 27.6x. While RCI.B 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. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. Check out our latest analysis for Rogers Communications
What you need to know about the P/E ratio
The P/E ratio is one of many ratios used in 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 RCI.B
Price-Earnings Ratio = Price per share ÷ Earnings per share
RCI.B Price-Earnings Ratio = 64.44 ÷ 2.012 = 32x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 RCI.B, 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. RCI.B’s P/E of 32x is higher than its industry peers (27.6x), which implies that each dollar of RCI.B’s earnings is being overvalued by investors. As such, our analysis shows that RCI.B represents an over-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to sell your RCI.B shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to RCI.B. 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 RCI.B, 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 RCI.B to are fairly valued by the market. If this is violated, RCI.B's P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Are you a shareholder? 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 RCI.B. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above.
Are you a potential investor? If RCI.B has been on your watch list for a while, it is best you also consider its intrinsic valuation. Looking at PE on its own will not give you the full picture of the stock as an investment, so I suggest you should also look at other relative valuation metrics like EV/EBITDA or PEG.
PE is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Rogers Communications for a more in-depth analysis of the stock to help you make a well-informed investment decision. Since we know a limitation of PE is it doesn't properly account for growth, you can use our free platform to see my list of stocks with a high growth potential and see if their PE is still reasonable.
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.
