Priced for perfection...
These are some of the financial expressions I don’t use anymore or that I’ve never used. Why? Because they’re all easy formulas for something that’s not that easy to evaluate.
Let’s take two examples. Two great companies which operate in a duopoly industry and which are very predictable: Mohawk Industries in the carpet corner and Mastercard in the electronic payment corner.
Mohawk Industries (MHK): After a couple of disappointing quarters, MHK has fallen to it’s lowest price in 5 years. It’s currently selling for 10 times next year’s earnings which is exceptionally cheap for that company. The average PE ratio has been around 18-20 for many many years even if it’s a cyclical company. But for the short term, I don’t see how things could improve that much. After all, many other construction-related stocks have been hurt a lot. But I trust historical datas and I’m sure MHK will be back to the 18-20 PE level in a few years. In other words, there’s no momentum there for the moment but it will be back like Rocky has been back stronger after his defeat. It’s probably gonna take the same time that it took between Rocky I and Rocky II.
Mastercard (MA): That one has been expensive for many years. But results have been great for years and it’s dominating position has improved steadily. It’s currently selling for 25 times next year’s earnings. But when you have a moat like Mastercard, when your ROE is that high (in the 80’s), when your growth is still spectacular (15-20% per year) and your debt level is low, how could you deserve a valuation of 15 times earnings?
So, these two are selling for a price they deserve. I think that Mohawk deserves a price slightly higher but that’s just my opinion.
Not any of these two deserve to be qualified of overvalued or undervalued or priced for perfection or whatever because when you compare them with other similar stocks (in a similar situation) they have similar valuations.