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VALUATION MULTIPLES

Discover and validate investing ideas using valuation multiples.

J. C. Penney Q3 Earnings: Is JCP Dirt Cheap at 0.3x Price/Book?

in EARNINGS/INVESTING IDEAS/VALUATION MULTIPLES by

With more people are going to the mall to enjoy the offerings of the food court than shop at the retailers, according to UBS, investors have definite cause for concern. That’s why analysts will be listening carefully to J. C. Penney Company, Inc. (NYSE:JCP) earnings call on November 15, 2019. The company is scheduled to report Q3 earnings results before markets open for trading on Friday.

JCP Total Revenues

The company is expected to report earnings of -$0.55/share on revenue of $2.421 billion. The consensus earnings per share (EPS) of -$0.55/share is based on a poll of 8 analysts.

The revenue forecast of $2.421 billion based on a poll of 7 analysts. Last year the company reported $2.653 billion in revenue for the quarter.

Expected to report EPS of -$0.55/share for Q3, 2019
Metric Expected Prior Year YoY Change
Revenue $2,421.00 $2,653.00 -8.7%
EPS -$0.55 -$0.52 NM

Earnings Call Trends

Historically, management has exceeded analyst expectations 5 out of the last 8 tracked quarters, and missed expectations 3 quarters. What are your expectations from J. C. Penney for this earnings this quarter? Let us know in the comments!

Analyst Expected vs Reported EPS
Quarter Expected Reported Surprise Result
Q2, 2020 -$0.32 -$0.18 NM Beat
Q1, 2020 -$0.37 -$0.46 NM Missed
Q4, 2019 $0.19 $0.18 -5.5% Missed
Q3, 2019 -$0.56 -$0.52 NM Beat
Q2, 2019 -$0.05 -$0.38 NM Missed
Q1, 2019 -$0.24 -$0.22 NM Beat
Q4, 2018 $0.47 $0.57 21.3% Beat
Q3, 2018 -$0.43 -$0.33 NM Beat

J. C. Penney’s stock price performance has been very reactive to earnings announcements in the past. After the last earnings report for the period ending August 3, 2019, the stock price reacted by increasing by 6.1%. In the following table, we summarize the company’s stock price movements after earnings releases. The “Price Day Prior” column shows the closing stock price on the day before the earnings report, and the “Price Next Day” column shows the stock price at the end of the trading day after the earnings report.

Stock Price Performance After Earnings
Report Date Price Day Prior Price Next Day Change % Result
2019-08-15 $0.57 $0.60 6.1% Increase
2019-05-21 $1.15 $1.01 -12.2% Decline
2019-02-28 $1.24 $1.54 24.2% Increase
2018-11-15 $1.22 $1.29 5.7% Increase

Fundamentals And Technical Analysis

J. C. Penney is currently trading at $1.12/share, up 3.7% for the day. The company is trading at approximately 58% of its 52-week high of $1.92/share. The company’s stock price has quietly been soaring over the last three months, up over 89% since the last earnings report.

JCP Stock Price

The question on everyones mind is – will the rally continue after earnings? J. C. Penney’s current share price implies a price-to-book (P/B) multiple of 0.3x which does make it seem cheap relative to book value. The company isn’t profitable though so the current share price also implies a price-to-earnings (P/E) multiple of -1.2x and a forward P/E multiple of -0.8x.

The company’s 14 Day Relative Price Index (RSI) of 56.14 suggests the company is trading in technically neutral territory. The RSI is considered overbought when above 70 and oversold when below 30. The following table summarizes some other key fundamental ratios:

Data as of November 11, 2019
Metric Value
Last Fiscal Period FY2020.Q2
Period End Date August 3, 2019
Stock Price (Current) $1.08
P/E Ratio -1.2x
P/E Ratio (Fwd) -0.8x
PEG Ratio NM
Total Debt to Capital (%) 93.9%
Levered Free Cash Flow $178.0 million
Enterprise Value / EBITDA 8.7x

Company Profile: J. C. Penney Company, Inc.

J. C. Penney Company, Inc. is a small-cap stock with a market capitalization of $343.3 million and a total enterprise value of $5.175 billion. The company operates in the Consumer Discretionary sector and Multiline Retail industry.

J. C. Penney Company, Inc. sells merchandise through department stores. The company primarily sells family apparel and footwear, accessories, fine and fashion jewelry, beauty products, and home furnishings; and provides services, including styling salon, optical, portrait photography, and custom decorating services.

As of November 1, 2019, it operated approximately 850 stores in the United States and Puerto Rico. The company also sells its products through its Website, jcpenney.com. The company was founded in 1902 and is based in Plano, Texas.

Should You Buy ENI S.p.A. (NYSE: E) At This P/E Multiple?

in VALUATION MULTIPLES by

ENI S.p.A. (NYSE: E) trades at a P/E multiple of 16.7x, which is lower than the Energy sector median of 17.1x. While this makes E appear like a stock to add to your portfolio, you might change your mind after gaining a better understanding of the assumptions behind the P/E ratio. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for.


Understanding Valuation Multiples and the P/E Ratio

A multiples valuation, also known as a comparable companies analysis, determines the value of a subject company by benchmarking the subject’s financial performance against similar public companies (peer group). We can infer if a company is undervalued or overvalued relative to its peers by comparing metrics like growth, profit margin, and valuation multiples.

P/E Multiple is a valuation ratio that indicates the multiple of earnings investors are willing to pay for one share of a company:

P/E Multiple = Stock Price ÷ Earnings Per Share

The P/E ratio is not meant to be viewed in isolation and is only useful when comparing it to other similar companies. Since it is expected that similar companies have similar P/E ratios, we can come to some conclusions about the stock if the ratios are different. I compare ENI S.p.A.’s P/E multiple to those of TOTAL S.A. (NYSE: TOT), Statoil ASA (NYSE: EQNR), BP p.l.c.(NYSE: BP) and Royal Dutch Shell plc (NYSE: RDS.B) in the chart below.

E P/E Ratio vs Peers Chartsource: finbox.io Benchmarks: P/E Multiples

Since ENI S.p.A.’s P/E of 16.7x is lower than the median of its peers (19.8x), it means that investors are paying less than they should for each dollar of E’s earnings. As such, our analysis shows that E represents an undervalued stock. In fact, finbox.io’s P/E Multiple Modelcalculates a fair value of roughly $48.50 per share which implies approximately 31.0% upside.

E P/E Valuation Calculation

Note that the selected multiple of 21.9x in the analysis above was determined by averaging ENI S.p.A.’s current P/E multiple with its peer group.


Understanding the P/E Ratio’s Limitations

Before jumping to the conclusion that ENI S.p.A. should be added to your portfolio, it is important to understand that our conclusion rests on two important assumptions.

(1) the selected peer group actually contains companies that truly are similar to ENI S.p.A., and

(2) the selected peer group stocks are being fairly valued by the market.

If the first assumption is not accurate, the difference in P/E ratios could be due to a variety of factors. For example, if you accidentally compare ENI S.p.A. with higher growth companies, then its P/E multiple would naturally be lower than its peers since investors reward high growth stocks with a higher price.

E Net Income Growth and Margins vs Peers Tablesource: P/E model

Now if the second assumption does not hold true, ENI S.p.A.’s lower multiple may be because firms in our peer group are being overvalued by the market.


What This Means For Investors

As a shareholder, you may have already conducted fundamental analysis on the stock so its current undervaluation could signal a potential buying opportunity to increase your position in E. However, keep in mind the limitations of the P/E ratio when making investment decisions. There are a variety of other fundamental factors that I have not taken into consideration in this article. If you have not done so already, I highly recommend that you complete your research on ENI S.p.A. by taking a look at the following:

Valuation Metrics: what is ENI S.p.A.’s free cash flow yield and how does it compare to its publicly traded peers? This metric measures the amount of free cash flow for each dollar of equity (market capitalization). Analyze the free cash flow yield here.

Risk Metrics: what is ENI S.p.A.’s cash ratio which is used to assess a company’s short-term liquidity. View the company’s cash ratio here.

Efficiency Metrics: return on equity is used to measure the return that a firm generates on the book value of common equity. View ENI S.p.A.’s return on equity here.

As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.

What is a Good P/E Ratio For Eagle Materials Inc (NYSE: EXP)?

in VALUATION MULTIPLES by

Eagle Materials Inc (NYSE: EXP) trades at a P/E multiple of 20.6x, which is higher than the Materials sector median of 19.3x. While this makes EXP appear like a stock to avoid or sell if you own it, you might change your mind after gaining a better understanding of the assumptions behind the P/E ratio. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for.


Understanding Valuation Multiples and the P/E Ratio

A multiples valuation, also known as a comparable companies analysis, determines the value of a subject company by benchmarking the subject’s financial performance against similar public companies (peer group). We can infer if a company is undervalued or overvalued relative to its peers by comparing metrics like growth, profit margin, and valuation multiples.

P/E Multiple is a valuation ratio that indicates the multiple of earnings investors are willing to pay for one share of a company:

P/E Multiple = Stock Price ÷ Earnings Per Share

The P/E ratio is not meant to be viewed in isolation and is only useful when comparing it to other similar companies. Since it is expected that similar companies have similar P/E ratios, we can come to some conclusions about the stock if the ratios are different. I compare Eagle Material’s P/E multiple to those of Summit Materials, Inc. (NYSE: SUM), Vulcan Materials Company (NYSE: VMC), Martin Marietta Materials, Inc. (NYSE: MLM) and USG Corporation(NYSE: USG) in the chart below.

EXP P/E Ratio vs Peers Chartsource: finbox.io Benchmarks: P/E Multiples

Since Eagle Material’s P/E of 20.6x is lower than the median of its peers (27.0x), it means that investors are paying less than they should for each dollar of EXP’s earnings. As such, our analysis shows that EXP represents an undervalued stock. In fact, finbox.io’s P/E Multiple Model calculates a fair value of roughly $115.50 per share which implies approximately 8.0% upside.

EXP P/E Valuation Calculation

Note that the selected multiple of 22.3x in the analysis above was determined by averaging Eagle Material’s current P/E multiple with its peer group.


Understanding the P/E Ratio’s Limitations

Before jumping to the conclusion that Eagle Material should be added to your portfolio, it is important to understand that our conclusion rests on two important assumptions.

(1) the selected peer group actually contains companies that truly are similar to Eagle Material, and

(2) the selected peer group stocks are being fairly valued by the market.

If the first assumption is not accurate, the difference in P/E ratios could be due to a variety of factors. For example, if you accidentally compare Eagle Material with higher growth companies, then its P/E multiple would naturally be lower than its peers since investors reward high growth stocks with a higher price.

EXP Net Income Growth and Margins vs Peers Tablesource: P/E model

Now if the second assumption does not hold true, Eagle Material’s lower multiple may be because firms in our peer group are being overvalued by the market.


What This Means For Investors

As a shareholder, you may have already conducted fundamental analysis on the stock so its current undervaluation could signal a potential buying opportunity to increase your position in EXP. However, keep in mind the limitations of the P/E ratio when making investment decisions. There are a variety of other fundamental factors that I have not taken into consideration in this article. If you have not done so already, I highly recommend that you complete your research on Eagle Material by taking a look at the following:

Valuation Metrics: what is Eagle Material’s short ratio and how does it compare to its publicly traded peers? It represents the percentage of total shares outstanding that is being shorted. View the short ratio here.

Risk Metrics: how much interest coverage does Eagle Material have? This is a ratio used to assess a firm’s ability to pay interest expenses based on operating profits (EBIT). View the company’s interest coverage here.

Efficiency Metrics: fixed asset turnover is calculated by dividing revenue by average fixed assets. View Eagle Material’s fixed asset turnover here.

As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.

Comparable Companies Analysis Suggests You Should Buy Cummins Inc. (NYSE: CMI)

in VALUATION MULTIPLES by

Cummins Inc. (NYSE: CMI) shares currently trade at 24.1x trailing earnings which is higher than the Industrials sector median of 22.2x. While this makes CMI look like a stock to avoid or sell if you own it, equity investors might change their mind after taking a closer look at the assumptions behind the P/E ratio. In this article, I define how to calculate a P/E multiple and what to keep an eye out for when applying it in a comparable companies analysis.


CMI Comparable Companies Analysis

A comparable companies analysis, also known as a multiples valuation, determines the value of a subject company by benchmarking its financial performance against similar public companies or peers. We can conclude if a company looks undervalued or overvalued relative to its peers by comparing metrics like growth, profit margin, and valuation ratios.

P/E Ratio is a valuation metric that indicates the multiple of earnings investors are willing to pay for one share of a company:

P/E Ratio = Stock Price ÷ Earnings Per Share

The P/E ratio by itself is not very helpful at all. It is only useful when comparing it to other companies that are considered similar to the subject company. The basic idea is that companies with similar characteristics should trade at similar multiples, all other things being equal. Therefore, we can come to a conclusion about the stock if the ratios are different. In the chart below, I compare CMI’s P/E ratio to its peer group that includes Deere & Company (NYSE: DE), Caterpillar, Inc. (NYSE: CAT), CNH Industrial N.V. (NYSE: CNHI) and Navistar International Corporation (NYSE: NAV).

CMI P/E Ratio vs Peers Chartsource: finbox.io Benchmarks: P/E Multiples

Since CMI’s P/E of 24.1x is lower than the median of its peers (35.1x), it means that investors are paying less than they should for each dollar of CMI’s earnings. As such, our analysis shows that CMI represents an undervalued stock. In fact, finbox.io’s P/E Multiple Model calculates a fair value of roughly $150.50 per share which implies around 12.5% upside.

CMI P/E Valuation Calculation

I selected a fair multiple of 27.1x in my analysis by averaging CMI’s current P/E ratio with its peer group.


Are Peers Really Comparable?

Before concluding that CMI should be added to your portfolio, it is important to understand that our conclusion rests on two important assumptions.

(1) the selected peer group actually contains companies that truly are similar to CMI, and

(2) the selected peer group stocks are being fairly valued by the market.

If the first assumption is not accurate, the difference in P/E ratios could be due to a variety of factors. For example, if you accidentally compare CMI with higher growth companies, then its P/E multiple would naturally be lower than its peers since investors reward high growth stocks with a higher price.

CMI Net Income Growth and Margins vs Peers Tablesource: P/E model

However, if the second assumption does not hold true, CMI’s lower multiple may be because firms in our peer group are being overvalued by the market.


How This Impacts Shareholders

As a shareholder, you may have already conducted fundamental analysis on the stock so its current undervaluation could signal a potential buying opportunity to increase your position in CMI. However, keep in mind the limitations of the P/E ratio when making investment decisions. There are a variety of other fundamental factors that I have not taken into consideration in this article. If you have not done so already, I highly recommend that you complete your research on CMI by taking a look at the following:

Valuation Metrics: what is CMI’s price to book ratio and how does it compare to its peers? Analyze Price / Book here.

Risk Metrics: what is CMI’s CapEx coverage? This is the amount a company outlays for capital assets for each dollar it generates from those investments. View the company’s CapEx coverage here.

Efficiency Metrics: inventory turnover is a ratio that measures the number of times a company’s inventory is sold and replaced over the year. View CMI’s inventory turnover here.

As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.

Should You Buy Best Buy Co, Inc (NYSE: BBY) On Account Of Its P/E Multiple?

in VALUATION MULTIPLES by

Best Buy Co., Inc. (NYSE: BBY), a consumer discretionary company with a market capitalization of $21.3 billion, currently trades at a P/E multiple of 21.3x which is above the sector’s median multiple of 19.1x. Although this makes BBY look unattractive, investors may change their mind after reviewing the assumptions behind the P/E ratio. In the post below, I explain how to apply P/E multiples and what to watch out for.


How To Utilize Best Buy’s PE Multiples

A multiples valuation, also known as a comparable companies analysis, determines the value of a subject company by benchmarking the subject’s financial performance against companies deemed to be similar. We can then determine if a company is undervalued or overvalued relative to its peers by comparing metrics like growth, profit margin, and valuation multiples.

P/E Ratio is a valuation metric that indicates the multiple of earnings investors are willing to pay for one share of a company:

P/E Ratio = Stock Price ÷ Earnings Per Share

The P/E ratio by itself is not very helpful at all. It is only useful when comparing it to other companies that are considered similar to the subject company. The basic idea is that companies with similar characteristics should trade at similar multiples, all other things being equal. Therefore, we can come to a conclusion about the stock if the ratios are different. In the chart below, I compare Best Buy’s P/E ratio to its peer group that includes Lowe’s Companies, Inc. (NYSE: LOW), TJX Companies, Inc. (The) (NYSE: TJX), Home Depot, Inc. (The) (NYSE: HD) and Gamestop Corporation (NYSE: GME).

BBY P/E Ratio vs Peers Chartsource: finbox.io Benchmarks: P/E Multiples

Since Best Buy’s P/E ratio of 21.3x is lower than the median of its peers (24.9x), it means that investors are paying less than they should for each dollar of BBY’s earnings. As such, our analysis shows that BBY represents an undervalued stock. Furthermore, finbox.io’s P/E Ratio Model calculates a fair value of approximately $100.00 per share which implies roughly 31.0% upside.

BBY P/E Valuation Calculation

I selected a fair multiple of 27.9x in my analysis by averaging Best Buy’s current P/E ratio with its peer group.


The P/E Ratio’s Flaws

While this approach typically provides a reasonable valuation range, it is important to understand that our conclusion rests on some important assumptions. The first being that the selected peer group actually contains companies that truly are similar to Best Buy. The second important assumption is that the selected peer group stocks are being fairly valued by the market.

If the assumptions above do not hold to be true, then the difference in P/E ratios could be due to a variety of factors. For example, if you accidentally compare Best Buy with higher growth companies, then its P/E multiple would naturally be lower than its peers since investors reward high growth stocks with a higher price.

BBY Net Income Growth and Margins vs Peers Tablesource: P/E model

On the other hand, if the second assumption does not hold true, Best Buy’s lower multiple may be because our selected comparable companies are being overvalued by the market.


What To Do Next

As a current investor, you may have already conducted fundamental analysis on the company and its stock so its current undervaluation could signal a potential buying opportunity to increase your position in BBY. But keep in mind the P/E ratio’s potential flaws when applying this valuation approach. It is important to note that there are a variety of other fundamental factors that I have not taken into consideration in this article. I highly recommend that you continue your research on Best Buy by taking a look at the following:

Valuation Metrics: how much upside do shares of Best Buy have based on the Ben Graham Formula? Take a look at our Ben Graham Formula data explorer which also compares the company’s upside to its peers.

Risk Metrics: what is Best Buy’s Altman Z score? It’s a famous formula used to predict the probability that a firm will go into bankruptcy within two years. View the company’s Altman Z score here.

Efficiency Metrics: how much free cash flow does Best Buy generate as a percentage of total sales? Has it been increasing or decreasing over time? Review the firm’s free cash flow margin here.

As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.

Is MGM Growth Properties LLC (NYSE: MGP) A Sell At This Enterprise Multiple?

in VALUATION MULTIPLES by

MGM Growth Properties LLC (NYSE: MGP) trades at an EBITDA Multiple of 18.3x, which is lower than the Real Estate sector median of 18.9x. While this makes MGP appear like a stock to add to your portfolio, you might change your mind after gaining a better understanding of the assumptions behind the EV / EBITDA ratio ratio. In this article, I will break down what an EBITDA Multiple is, how to interpret it and what to watch out for.


Understanding Valuation Multiples and EV / EBITDA

A multiples valuation, also known as a comparable companies analysis, determines the value of a subject company by benchmarking the subject’s financial performance against similar public companies (peer group). We can infer if a company is undervalued or overvalued relative to its peers by comparing metrics like growth, profit margin, and valuation multiples.

An EBITDA Multiple, also known as Enterprise Value-to-EBITDA Multiple (EV/EBITDA), measures the dollars in Enterprise Value for each dollar of EBITDA. To determine if a company is expensive, it’s far more useful to compare EV / EBITDA multiples than the absolute stock price. Furthermore, its key benefit over the P/E multiple is that it’s capital structure-neutral, and, therefore, better at comparing companies with different levels of debt. The general formula behind an EBITDA Multiples valuation model is the following:

Enterprise Value = EBITDA x Selected Multiple

An EBITDA multiple is not meant to be viewed in isolation and is only useful when comparing it to other similar companies. Since it is expected that similar companies have similar EV / EBITDA ratios, we can come to some conclusions about the stock if the ratios are different. I compare MGM Growth’s EBITDA multiple to those of LaSalle Hotel Properties (NYSE: LHO), Sunstone Hotel Investors, Inc. (NYSE: SHO), Host Hotels & Resorts, Inc. (NYSE: HST) and Federal Realty Investment Trust (NYSE: FRT) in the chart below.

MGP EBITDA Multiple vs Peers Chartsource: finbox.io Benchmarks: EBITDA Multiples

Since MGM Growth’s EBITDA multiple of 18.3x is higher than the median of its peers (14.7x), it means that investors are paying more than they should for each dollar of MGP’s EBITDA. As such, our analysis shows that MGP represents an overvalued stock. In fact, finbox.io’s EBITDA Multiples Model calculates a fair value of roughly $27.50 per share which implies approximately 12.5% downside.

MGP EV / EBITDA Valuation Calculation

Note that the selected multiple of 16.8x in the analysis above was determined by averaging MGM Growth’s current EBITDA multiple with its peer group and sector.


Understanding the EV / EBITDA Ratio’s Limitations

Before jumping to the conclusion that MGM Growth should be banished from your portfolio, it is important to understand that our conclusion rests on two important assumptions.

(1) the selected peer group actually contains companies that truly are similar to MGM Growth, and

(2) the selected peer group stocks are being fairly valued by the market.

If the first assumption is not accurate, the difference in EBITDA multiples could be due to a variety of factors. For example, if you accidentally compare MGM Growth with lower growth companies, then its EBITDA multiple would naturally be higher than its peers since investors reward high growth stocks with a higher price.

MGP EBITDA Growth and Margins vs Peers Tablesource: EBITDA multiples model

Now if the second assumption does not hold true, MGM Growth’s higher multiple may be because firms in our peer group are being undervalued by the market.


What This Means For Investors

As a shareholder, you may have already conducted fundamental analysis on the stock so its current overvaluation could signal a potential selling opportunity to reduce your exposure to MGP. However, keep in mind the limitations of an EBITDA multiples valuation when making an investment decision. There are a variety of other fundamental factors that I have not taken into consideration in this article. If you have not done so already, I highly recommend that you complete your research on MGM Growth by taking a look at the following:

Valuation Metrics: how much upside do shares of MGM Growth have based on Wall Street’s consensus price target? Take a look at our analyst upside data explorer that compares the company’s upside relative to its peers.

Risk Metrics: how is MGM Growth’s financial health? Find out by viewing our financial leverage data metric which plots the dollars in total assets for each dollar of common equity over time.

Efficiency Metrics: is management becoming more or less efficient over time? Find out by analyzing the company’s asset turnover ratio which measures the dollars in revenue a company generates per dollar of assets.

As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.

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