Yahoo Finance Is Mondelez International Inc (NASDAQ:MDLZ) Attractive At Its Current PE Ratio?
I am writing today to help inform people who are new to the stock market and want to begin learning about how to value company based on its current earnings and what are the drawbacks of this method.
Mondelez International Inc (NASDAQ:MDLZ) trades with a trailing P/E of 20.9, which is higher than the industry average of 17.9. Though this might seem to be a negative, 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.
See our latest analysis for Mondelez International
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 MDLZ
Price-Earnings Ratio = Price per share ÷ Earnings per share
MDLZ Price-Earnings Ratio = $42.78 ÷ $2.048 = 20.9x
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 MDLZ, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. Since MDLZ’s P/E of 20.9 is higher than its industry peers (17.9), it means that investors are paying more for each dollar of MDLZ’s earnings. This multiple is a median of profitable companies of 25 Food companies in US including Kaibo Foods, China Modern Agricultural Information and Amira Nature Foods. You could think of it like this: the market is pricing MDLZ as if it is a stronger company than the average of its industry group.
Assumptions to be aware of
Before you jump to conclusions it is important to realise that there are assumptions in this analysis. Firstly, that our peer group contains companies that are similar to MDLZ. If this isn’t the case, the difference in P/E could be due to other factors. For example, if Mondelez International Inc is growing faster than its peers, then it would deserve a higher P/E ratio. Of course, it is possible that the stocks we are comparing with MDLZ are not fairly valued. Just because it is trading on a higher P/E ratio than its peers does not mean it must be overvalued. After all, the peer group could be undervalued.
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 MDLZ. 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 MDLZ’s future growth? Take a look at our free research report of analyst consensus for MDLZ’s outlook.
Past Track Record: Has MDLZ 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 MDLZ’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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
