Hi there,
quick one on PE ratios. Let’s take Exxon, as many other energy companies they had a boom of earnings → PE ratio went down.
Looking solely at the PE you could argue the stock is on sale, but is it ?
Am I correct in thinking that if there’s less earnings in the future the PE will go up or the price will come down and PE stays more or less the same ? Basically what I’m arguing is that despite the PE ratio screaming buy, if Oil prices decline this will lose money… despite an attractive PE. Would you look at other metrics instead ?
First, PE (with fixed price) goes down with earnings up, and up with earnings down.
It is Price over Earnings ratio, so it goes the same direction as price and inverse direction of earnings.
Secondly, 9.6 PE is actually on the high side for the Oil industry. Around 7-8 is the industry average, without much deviation.
Thirdly, your instinct is rather correct; current earnings are heavily distorted as the global energy market is facing multiple shocks. While this will probably last a little while, over a longer timeframe we should not expect to see such record profits becoming a norm.
This is actually reflected in the current PE being quite high; it screams more of a sell than a buy.
Thanks. Makes sense. I was looking at that long term PE chart for XOM which seems to be back to its average indicating some sort of “fair value” but as you said the earnings boom is unlikely to continue.
