Southern Copper Corporation (NYSE:SCCO) trades with a trailing P/E of 45.1x, which is higher than the industry average of 12.6x. While this makes SCCO appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. Today, 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 Southern Copper
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 SCCO
Price-Earnings Ratio = Price per share ÷ Earnings per share
SCCO Price-Earnings Ratio = $51.65 ÷ $1.145 = 45.1x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to SCCO, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 45.1x, SCCO’s P/E is higher than its industry peers (12.6x). This implies that investors are overvaluing each dollar of SCCO’s earnings. Therefore, according to this analysis, SCCO is an over-priced stock.
A few caveats
Before you jump to the conclusion that SCCO should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to SCCO. 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 SCCO, 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 SCCO to are fairly valued by the market. If this does not hold true, SCCO’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
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 SCCO. 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 urge you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for SCCO’s future growth? Take a look at our free research report of analyst consensus for SCCO’s outlook.
- Past Track Record: Has SCCO 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 SCCO’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.