I am writing today to help inform people who are new to the stock market and want to begin learning the link between Ternium SA (NYSE:TX)’s fundamentals and stock market performance.
Ternium SA (NYSE:TX) is trading with a trailing P/E of 7x, which is lower than the industry average of 12.3x. 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 break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for Ternium
Breaking down the Price-Earnings 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 TX
Price-Earnings Ratio = Price per share ÷ Earnings per share
TX Price-Earnings Ratio = $35.11 ÷ $5.051 = 7x
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 TX, 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. TX’s P/E of 7x is lower than its industry peers (12.3x), which implies that each dollar of TX’s earnings is being undervalued by investors. As such, our analysis shows that TX represents an under-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to buy TX immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to TX. 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 TX, 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 TX to are fairly valued by the market. If this does not hold true, TX’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 add more of TX 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 TX’s future growth? Take a look at our free research report of analyst consensus for TX’s outlook.
- Past Track Record: Has TX 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 TX’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.