Crown Castle International Corp (REIT) (NYSE:CCI) trades with a trailing P/E of 90.4x, which is higher than the industry average of 30.4x. While CCI might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for Crown Castle International (REIT)
What you need to know about 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 CCI
Price-Earnings Ratio = Price per share ÷ Earnings per share
CCI Price-Earnings Ratio = $108.35 ÷ $1.198 = 90.4x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as CCI, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. Since CCI’s P/E of 90.4x is higher than its industry peers (30.4x), it means that investors are paying more than they should for each dollar of CCI’s earnings. Therefore, according to this analysis, CCI is an over-priced stock.
A few caveats
However, before you rush out to sell your CCI shares, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to CCI, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with CCI, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing CCI to are fairly valued by the market. If this does not hold, there is a possibility that CCI’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Are you a shareholder? If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to rebalance your portfolio and reduce your holdings in CCI. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above.
Are you a potential investor? If you are considering investing in CCI, looking at the PE ratio on its own is not enough to make a well-informed decision. You will benefit from looking at additional analysis and considering its intrinsic valuation along with other relative valuation metrics like PEG and EV/Sales.