Question

Could someone please provide me with assistance on this question. Thanks in advance..

For this question we will be using P/E ratio.

Coca-Cola P/E Ratio = 26.32

Dr. Pepper P/E Ratio = 36.68

Pepsi P/E Ratio = 28.27

Comparing the P/E ratio of Coca-Cola Co with major competitors, Dr. Pepper and Pepsi. Is there a difference between these numbers? Is the stock overvalued, undervalued, or properly valued? Why? is it reasonable to buy the stock? Please explain

Answer 1

A Price Earning Ratio indicates the number of times the Earning per share commands the market price. Generally higher the PE ratio given a constant EPS the market price will be higher. A PE ratio can be used for analyzing whether a company is undervalued or overvalued compared to its peers. If the firm is having lower PE ratio compared to its Peer it means firm is undervalued and if company performs well its stock price will increase .

In the given situation Coca- Cola is having lower PE ratio compared to Dr. Pepper and Pepsi it can be implied that Coca- Cola is under-valued compared to it Peer companies. However it should be noted PE ratio is only one of the measure to see if stock is overvalued , undervalued or properly valued. An undervalued stock can deliver returns only when its earnings per share will be growing. Hence in the given situation Coca- Cola is undervalued stock and is a reasonable buy but its returns will depend on its ability to grow Earning per share