Yahoo Finance How Does InterContinental Hotels Group's (LON:IHG) P/E Compare To Its Industry, After The Share Price Drop?
To the annoyance of some shareholders, InterContinental Hotels Group (LON:IHG) shares are down a considerable 31% in the last month. Even longer term holders have taken a real hit with the stock declining 27% in the last year.
All else being equal, a share price drop should make a stock more attractive to potential investors. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.
See our latest analysis for InterContinental Hotels Group
How Does InterContinental Hotels Group's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 19.81 that there is some investor optimism about InterContinental Hotels Group. As you can see below, InterContinental Hotels Group has a higher P/E than the average company (17.9) in the hospitality industry.
That means that the market expects InterContinental Hotels Group will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
It's great to see that InterContinental Hotels Group grew EPS by 15% in the last year. Unfortunately, earnings per share are down 3.8% a year, over 3 years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.
InterContinental Hotels Group's Balance Sheet
Net debt is 26% of InterContinental Hotels Group's market cap. You'd want to be aware of this fact, but it doesn't bother us.
The Verdict On InterContinental Hotels Group's P/E Ratio
InterContinental Hotels Group trades on a P/E ratio of 19.8, which is above its market average of 13.9. While the company does use modest debt, its recent earnings growth is very good. Therefore, it's not particularly surprising that it has a above average P/E ratio. Given InterContinental Hotels Group's P/E ratio has declined from 28.8 to 19.8 in the last month, we know for sure that the market is significantly less confident about the business today, than it was back then. For those who don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.
Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
But note: InterContinental Hotels Group 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.
