Should You Sell Altra Industrial Motion Corp (AIMC) At This PE Ratio?
Altra Industrial Motion Corp (NASDAQ:AIMC) trades with a trailing P/E of 33x, which is higher than the industry average of 23.9x. While AIMC 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. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. Check out our latest analysis for Altra Industrial Motion
Breaking down 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 AIMC
Price-Earnings Ratio = Price per share ÷ Earnings per share
AIMC Price-Earnings Ratio = $47.65 ÷ $1.445 = 33x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as AIMC, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. AIMC’s P/E of 33x is higher than its industry peers (23.9x), which implies that each dollar of AIMC’s earnings is being overvalued by investors. As such, our analysis shows that AIMC represents an over-priced stock.
A few caveats
However, before you rush out to sell your AIMC shares, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to AIMC. 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 AIMC, 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 AIMC to are fairly valued by the market. If this does not hold true, AIMC’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
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 AIMC. 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 AIMC 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 Altra Industrial Motion 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.
