MD.C. Holdings Inc. (NYSE:MDC) trades with a trailing P/E of 11.4x, which is lower than the industry average of 15.7x. While MDC might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. 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 M.D.C. Holdings
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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 MDC
Price-Earnings Ratio = Price per share ÷ Earnings per share
MDC Price-Earnings Ratio = $28.88 ÷ $2.536 = 11.4x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to MDC, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 11.4x, MDC’s P/E is lower than its industry peers (15.7x). This implies that investors are undervaluing each dollar of MDC’s earnings. Therefore, according to this analysis, MDC is an under-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that MDC is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to MDC, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with MDC, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing MDC to are fairly valued by the market. If this is violated, MDC’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 MDC, 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 MDC’s future growth? Take a look at our free research report of analyst consensus for MDC’s outlook.
Past Track Record: Has MDC 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 MDC’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.
This news has been published by title Should You Be Tempted To Buy MD.C. Holdings Inc. (NYSE:MDC) At Its Current PE Ratio?
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