This article is intended for those of you who are at the beginning of your investing journey and want to begin learning the link between Martin Midstream Partners LP (NASDAQ:MMLP)’s fundamentals and stock market performance.
Martin Midstream Partners LP (NASDAQ:MMLP) is currently trading at a trailing P/E of 33.6x, which is higher than the industry average of 13.4x. 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 explain what the P/E ratio is as well as what you should look out for when using it. View out our latest analysis for Martin Midstream Partners
Breaking down the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 MMLP
Price-Earnings Ratio = Price per share ÷ Earnings per share
MMLP Price-Earnings Ratio = $14 ÷ $0.417 = 33.6x
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 MMLP, 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. Since MMLP’s P/E of 33.6x is higher than its industry peers (13.4x), it means that investors are paying more than they should for each dollar of MMLP’s earnings. Therefore, according to this analysis, MMLP is an over-priced stock.
Assumptions to watch out for
However, before you rush out to sell your MMLP 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 MMLP. 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 MMLP, 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 MMLP to are fairly valued by the market. If this does not hold true, MMLP’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
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 rebalance your portfolio and reduce your holdings in MMLP. 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 highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for MMLP’s future growth? Take a look at our free research report of analyst consensus for MMLP’s outlook.
- Past Track Record: Has MMLP 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 MMLP’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.