Should You Be Tempted To Sell Monarch Casino & Resort Inc (NASDAQ:MCRI) Because Of Its PE Ratio?
I am writing today to help inform people who are new to the stock market and want to begin learning about how to value company based on its current earnings and what are the drawbacks of this method.
Monarch Casino & Resort Inc (NASDAQ:MCRI) is currently trading at a trailing P/E of 27.5, which is higher than the industry average of 20.1. While this might not seem positive, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for.
View our latest analysis for Monarch Casino & Resort
Demystifying the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. 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 MCRI
Price-Earnings Ratio = Price per share ÷ Earnings per share
MCRI Price-Earnings Ratio = $45.63 ÷ $1.658 = 27.5x
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. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as MCRI, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. Since MCRI’s P/E of 27.5 is higher than its industry peers (20.1), it means that investors are paying more for each dollar of MCRI’s earnings. This multiple is a median of profitable companies of 25 Hospitality companies in US including China Enterprises, Transat A.T and Caesars Entertainment. You could think of it like this: the market is pricing MCRI as if it is a stronger company than the average of its industry group.
Assumptions to be aware of
Before you jump to conclusions it is important to realise that there are assumptions in this analysis. The first is that our “similar companies” are actually similar to MCRI. If not, the difference in P/E might be a result of other factors. For example, if Monarch Casino & Resort Inc is growing faster than its peers, then it would deserve a higher P/E ratio. We should also be aware that the stocks we are comparing to MCRI may not be fairly valued. Just because it is trading on a higher P/E ratio than its peers does not mean it must be overvalued. After all, the peer group could be undervalued.
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 MCRI. 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 MCRI’s future growth? Take a look at our free research report of analyst consensus for MCRI’s outlook.
Past Track Record: Has MCRI 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 MCRI’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.
