Yahoo Finance Is Kansas City Southern (NYSE:KSU) A Buy At Its Current PE Ratio?
The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to better understand how you can grow your money by investing in Kansas City Southern (NYSE:KSU).
Kansas City Southern (NYSE:KSU) is currently trading at a trailing P/E of 11.6x, which is lower than the industry average of 16.2x. While this makes KSU appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. View out our latest analysis for Kansas City Southern
Demystifying 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 KSU
Price-Earnings Ratio = Price per share ÷ Earnings per share
KSU Price-Earnings Ratio = $106.86 ÷ $9.242 = 11.6x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 KSU, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. KSU’s P/E of 11.6x is lower than its industry peers (16.2x), which implies that each dollar of KSU’s earnings is being undervalued by investors. Therefore, according to this analysis, KSU is an under-priced stock.
A few caveats
Before you jump to the conclusion that KSU is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to KSU. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with KSU, 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 KSU to are fairly valued by the market. If this does not hold true, KSU’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 undervaluation could signal a good buying opportunity to increase your exposure to KSU. 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 KSU’s future growth? Take a look at our free research report of analyst consensus for KSU’s outlook.
Past Track Record: Has KSU 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 KSU’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.
