Yahoo Finance How Does Lowe's Companies's (NYSE:LOW) P/E Compare To Its Industry, After The Share Price Drop?
To the annoyance of some shareholders, Lowe's Companies (NYSE:LOW) shares are down a considerable 42% in the last month. The recent drop has obliterated the annual return, with the share price now down 30% over that longer period.
All else being equal, a share price drop should make a stock more attractive to potential investors. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. Perhaps the simplest way to get a read on investors' expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
See our latest analysis for Lowe's Companies
How Does Lowe's Companies's P/E Ratio Compare To Its Peers?
Lowe's Companies's P/E of 13.22 indicates some degree of optimism towards the stock. You can see in the image below that the average P/E (9.1) for companies in the specialty retail industry is lower than Lowe's Companies's P/E.
Lowe's Companies's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the 'E' will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Lowe's Companies's earnings made like a rocket, taking off 92% last year. The cherry on top is that the five year growth rate was an impressive 15% per year. So I'd be surprised if the P/E ratio was not above average.
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. So it won't reflect the advantage of cash, or disadvantage of debt. 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 spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
Is Debt Impacting Lowe's Companies's P/E?
Lowe's Companies has net debt equal to 33% of its market cap. While that's enough to warrant consideration, it doesn't really concern us.
The Bottom Line On Lowe's Companies's P/E Ratio
Lowe's Companies's P/E is 13.2 which is about average (12.7) in the US market. When you consider the impressive EPS growth last year (along with some debt), it seems the market has questions about whether rapid EPS growth will be sustained. Given analysts are expecting further growth, one might have expected a higher P/E ratio. That may be worth further research. Given Lowe's Companies's P/E ratio has declined from 22.8 to 13.2 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. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E 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.
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