Is CenturyLink Inc (NYSE:CTL) A Buy At Its Current PE Ratio?
CenturyLink Inc (NYSE:CTL) is trading with a trailing P/E of 10.3x, which is lower than the industry average of 15.8x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. Check out our latest analysis for CenturyLink
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 CTL
Price-Earnings Ratio = Price per share ÷ Earnings per share
CTL Price-Earnings Ratio = $18.18 ÷ $1.766 = 10.3x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as CTL, 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. Since CTL’s P/E of 10.3x is lower than its industry peers (15.8x), it means that investors are paying less than they should for each dollar of CTL’s earnings. Therefore, according to this analysis, CTL is an under-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to buy CTL immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to CTL. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with CTL, 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 CTL to are fairly valued by the market. If this does not hold true, CTL’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on CTL, 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 CTL’s future growth? Take a look at our free research report of analyst consensus for CTL’s outlook.
Past Track Record: Has CTL 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 CTL’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.