Should You Sell American Tower Corporation (AMT) At This PE Ratio?
American Tower Corporation (NYSE:AMT) is currently trading at a trailing P/E of 55.6x, which is higher than the industry average of 33.2x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. Today, 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 AMT
Demystifying 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 AMT
Price-Earnings Ratio = Price per share ÷ Earnings per share
AMT Price-Earnings Ratio = 139.97 ÷ 2.517 = 55.6x
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. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to AMT, 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. AMT’s P/E of 55.6x is higher than its industry peers (33.2x), which implies that each dollar of AMT’s earnings is being overvalued by investors. Therefore, according to this analysis, AMT is an over-priced stock.
Assumptions to watch out for
However, before you rush out to sell your AMT 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 AMT. 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 AMT, 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 AMT to are fairly valued by the market. If this does not hold true, AMT’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 AMT. 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 you are considering investing in AMT, basing your decision on the PE metric at one point in time is certainly not sufficient. I recommend you do additional analysis by looking at its intrinsic valuation and using other relative valuation ratios like PEG or EV/EBITDA.
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 American Tower 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.
