Should You Be Tempted To Buy Miller Industries Inc (NYSE:MLR) Because Of Its PE Ratio?
This article is intended for those of you who are at the beginning of your investing journey and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.
Miller Industries Inc (NYSE:MLR) trades with a trailing P/E of 10.6x, which is lower than the industry average of 21.2x. While MLR might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. 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 Miller Industries
Demystifying the P/E ratio
P/E is a popular ratio used for 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 MLR
Price-Earnings Ratio = Price per share ÷ Earnings per share
MLR Price-Earnings Ratio = $26.03 ÷ $2.462 = 10.6x
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 MLR, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since MLR’s P/E of 10.6 is lower than its industry peers (21.2), it means that investors are paying less for each dollar of MLR’s earnings. This multiple is a median of profitable companies of 24 Machinery companies in US including Eco Energy Tech Asia, Hebron Technology and EnPro Industries. One could put it like this: the market is pricing MLR as if it is a weaker company than the average company in its industry.
A few caveats
However, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to MLR, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with MLR, 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 MLR to are fairly valued by the market. If this does not hold true, MLR’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to MLR. 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. 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 MLR’s future growth? Take a look at our free research report of analyst consensus for MLR’s outlook.
Past Track Record: Has MLR 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 MLR’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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
