Does Miller Industries, Inc. (NYSE:MLR) Have A Good P/E Ratio?

January 27, 2020
  •  Updated
October 02, 2022
NYSE:MLR
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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we'll show how Miller Industries, Inc.'s (NYSE:MLR) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, Miller Industries has a P/E ratio of 10.82. That corresponds to an earnings yield of approximately 9.2%.

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How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Miller Industries:

P/E of 10.82 = USD36.29 ÷ USD3.35 (Based on the trailing twelve months to September 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

Does Miller Industries Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio essentially measures market expectations of a company. We can see in the image below that the average P/E (22.5) for companies in the machinery industry is higher than Miller Industries's P/E.

NYSE:MLR Price Estimation Relative to Market, January 27th 2020
NYSE:MLR Price Estimation Relative to Market, January 27th 2020

Miller Industries's P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.

Miller Industries increased earnings per share by an impressive 18% over the last twelve months. And it has bolstered its earnings per share by 27% per year over the last five years. This could arguably justify a relatively high P/E ratio.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

Is Debt Impacting Miller Industries's P/E?

The extra options and safety that comes with Miller Industries's US$17m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.

The Bottom Line On Miller Industries's P/E Ratio

Miller Industries has a P/E of 10.8. That's below the average in the US market, which is 18.6. Not only should the net cash position reduce risk, but the recent growth has been impressive. The below average P/E ratio suggests that market participants don't believe the strong growth will continue.

Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. We don't have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

But note: Miller Industries may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.

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