Altria Group Inc (NYSE:MO) trades with a trailing P/E of 9.9x, which is lower than the industry average of 16.1x. 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 explain what the P/E ratio is as well as what you should look out for when using it. View our latest analysis for Altria Group
What you need to know about 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 MO
Price-Earnings Ratio = Price per share ÷ Earnings per share
MO Price-Earnings Ratio = $55.19 ÷ $5.6 = 9.9x
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 MO, 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 MO’s P/E of 9.9x is lower than its industry peers (16.1x), it means that investors are paying less than they should for each dollar of MO’s earnings. As such, our analysis shows that MO represents an under-priced stock.
A few caveats
While our conclusion might prompt you to buy MO immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to MO. 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 MO, 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 MO to are fairly valued by the market. If this is violated, MO’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Since you may have already conducted your due diligence on MO, the undervaluation of the stock may mean it is a good time to top up on your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined 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 highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for MO’s future growth? Take a look at our free research report of analyst consensus for MO’s outlook.
- Past Track Record: Has MO 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 MO’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.