Is It Time To Sell Mylan NV. (NASDAQ:MYL) Based Off Its PE Ratio?
Mylan NV. (NASDAQ:MYL) trades with a trailing P/E of 28.4x, which is higher than the industry average of 23.5x. 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. 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 Mylan
What you need to know about the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 MYL
Price-Earnings Ratio = Price per share ÷ Earnings per share
MYL Price-Earnings Ratio = $38.5 ÷ $1.354 = 28.4x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 MYL, 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. Since MYL’s P/E of 28.4x is higher than its industry peers (23.5x), it means that investors are paying more than they should for each dollar of MYL’s earnings. Therefore, according to this analysis, MYL is an over-priced stock.
A few caveats
While our conclusion might prompt you to sell your MYL shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to MYL, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with MYL, 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 MYL to are fairly valued by the market. If this is violated, MYL’s P/E may be lower than its peers as they are actually overvalued by investors.
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 MYL. 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:
Future Outlook: What are well-informed industry analysts predicting for MYL’s future growth? Take a look at our free research report of analyst consensus for MYL’s outlook.
Past Track Record: Has MYL 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 MYL’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.
