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Should You Be Tempted To Sell Summit Materials Inc (NYSE:SUM) At Its Current PE Ratio?

The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to learn about the link between company’s fundamentals and stock market performance.

Summit Materials Inc (NYSE:SUM) is trading with a trailing P/E of 16, which is close to the industry average of 15.7. Although some investors may see this as unappealing, it is important to understand the assumptions behind the P/E ratio before making judgments. 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 Summit Materials

Breaking down the P/E ratio

NYSE:SUM PE PEG Gauge October 12th 18

The P/E ratio is a popular ratio used in relative valuation since earnings power is a key 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 SUM

Price-Earnings Ratio = Price per share ÷ Earnings per share

SUM Price-Earnings Ratio = $15.38 ÷ $0.960 = 16x

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. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to SUM, 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. Summit Materials Inc (NYSE:SUM) is currently trading at a trailing P/E of 16, which is close to the industry average of 15.7. This multiple is a median of profitable companies of 11 Basic Materials companies in US including ReTo Eco-Solutions, China Advanced Construction Materials Group and Monarch Cement. One could put it like this: the market is pricing SUM as if it is roughly average for its industry.

Assumptions to watch out for

However, you should be aware that this analysis makes certain assumptions. The first is that our “similar companies” are actually similar to SUM. If not, the difference in P/E might be a result of other factors. Take, for example, the scenario where Summit Materials Inc is growing profits more quickly than the average comparable company. In that case, the market may be correct to value it on a higher P/E ratio. We should also be aware that the stocks we are comparing to SUM 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:

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 SUM. 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 highly recommend you to complete your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for SUM’s future growth? Take a look at our free research report of analyst consensus for SUM’s outlook.
  2. Past Track Record: Has SUM 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 SUM’s historicals for more clarity.
  3. 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.