CNX Midstream Partners LP (NYSE:CNXM) is trading with a trailing P/E of 11.2x, which is lower than the industry average of 14.2x. 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 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 CNX Midstream Partners
What you need to know about 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 CNXM
Price-Earnings Ratio = Price per share ÷ Earnings per share
CNXM Price-Earnings Ratio = $18.77 ÷ $1.669 = 11.2x
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 CNXM, 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. At 11.2x, CNXM’s P/E is lower than its industry peers (14.2x). This implies that investors are undervaluing each dollar of CNXM’s earnings. As such, our analysis shows that CNXM represents an under-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that CNXM is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to CNXM. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with CNXM, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing CNXM to are fairly valued by the market. If this is violated, CNXM’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to add more of CNXM to your portfolio. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned 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 urge you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for CNXM’s future growth? Take a look at our free research report of analyst consensus for CNXM’s outlook.
- Past Track Record: Has CNXM 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 CNXM’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 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.