It hasn't been a great afternoon session for CNH Industrial investors, who have watched their shares sink by -1.9% to a price of $17.14. Some of you might be wondering if it's time to buy the dip. If you are considering this, make sure to check the company's fundamentals first to determine if the shares are fairly valued at today's prices.
CNH Industrial N.V. designs, produces, markets, sells, and finances agricultural and construction equipment, trucks, commercial vehicles, buses, and specialty vehicles in North America, Europe, South America, and internationally. The company belongs to the Industrials sector, which has an average price to earnings (P/E) ratio of 21.46 and an average price to book (P/B) ratio of 3.7. In contrast, CNH Industrial has a trailing 12 month P/E ratio of 12.7 and a P/B ratio of 3.6.
P/B ratios are calculated by dividing the company's market value by its book value. The book value refers to all of the company's tangible assets minus its liabilities -- meaning that intangibles such as intellectual property, brand name, and good will are not taken into account. Traditionally, a P/B ratio of around 1 shows that a company is fairly valued, but owing to consistently higher valuations in the modern era, investors generally compare against sector averages.
P/E ratios have their limits on their usefulness too. Since the P/E ratio is the share price divided by earnings per share, the ratio is determined partially by market sentiment on the stock. Sometimes a negative sentiment translates to a lower market price and therefore a lower P/E ratio -- and there might be good reasons for this negative sentiment.
One of the main reasons not to blindly invest in a company with a low P/E ratio is that it might have low growth expectations. Low growth correlates with low stock performance, so it's useful to factor growth into the valuation process. One of the easiest ways to do this is to divide the company's P/E ratio by its expected growth rate, which results in the price to earnings growth, or PEG ratio.
CNH Industrial's PEG ratio is 1.22, which tells us the company is fairly valued in terms of growth. PEG ratios under 1 are considered an indicator of undervalued growth, but we need to keep in mind that many successful companies with excellent share performance have maintained much higher PEG ratios.
As always, a quantitative approach to a stock should be supplemented with a look at qualitative factors, such as the competence of its management team, quality of its corporate culture, and the wide variety of social and economic factors that can impact the success of its product.
