Coca-Cola FEMSA SAB de CV (NYSE:KOF) is trading with a trailing P/E of 20x, which is lower than the industry average of 23.8x. While KOF 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 Coca-Cola FEMSA. de
Demystifying the P/E ratio
P/E is a popular ratio used for relative valuation. 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 KOF
Price-Earnings Ratio = Price per share ÷ Earnings per share
KOF Price-Earnings Ratio = MX$1318.67 ÷ MX$65.9 = 20x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as KOF, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. KOF’s P/E of 20x is lower than its industry peers (23.8x), which implies that each dollar of KOF’s earnings is being undervalued by investors. Therefore, according to this analysis, KOF is an under-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that KOF 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 KOF, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with KOF, 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 KOF to are fairly valued by the market. If this is violated, KOF’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Are you a shareholder? 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 KOF. 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.
Are you a potential investor? If you are considering investing in KOF, basing your decision on the PE metric at one point in time is certainly not sufficient. I recommend you do additional analysis by looking at its intrinsic valuation and using other relative valuation ratios like PEG or EV/EBITDA.