Should You Sell MoneyGram International Inc (MGI) At $16.03?
MoneyGram International Inc (NASDAQ:MGI) trades with a trailing P/E of 30.8x, which is higher than the industry average of 28.5x. 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 break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for MGI
Breaking down the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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 MGI
Price-Earnings Ratio = Price per share ÷ Earnings per share
MGI Price-Earnings Ratio = 16.03 ÷ 0.52 = 30.8x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to MGI, 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. Since MGI's P/E of 30.8x is higher than its industry peers (28.5x), it means that investors are paying more than they should for each dollar of MGI's earnings. Therefore, according to this analysis, MGI is an over-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to sell your MGI shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to MGI. 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 MGI, 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 MGI to are fairly valued by the market. If this does not hold, there is a possibility that MGI’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Are you a shareholder? You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to MGI. 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.
Are you a potential investor? If you are considering investing in MGI, 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 MoneyGram International 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.
