Yahoo Finance How Does Prosperity Bancshares's (NYSE:PB) P/E Compare To Its Industry, After The Share Price Drop?
Unfortunately for some shareholders, the Prosperity Bancshares (NYSE:PB) share price has dived 33% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 35% in that time.
Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
See our latest analysis for Prosperity Bancshares
Does Prosperity Bancshares Have A Relatively High Or Low P/E For Its Industry?
Prosperity Bancshares's P/E of 10.12 indicates some degree of optimism towards the stock. You can see in the image below that the average P/E (8.8) for companies in the banks industry is lower than Prosperity Bancshares's P/E.
Its relatively high P/E ratio indicates that Prosperity Bancshares shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and 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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Prosperity Bancshares's earnings per share fell by 1.9% in the last twelve months. But over the longer term (3 years), earnings per share have increased by 4.7%.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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.
How Does Prosperity Bancshares's Debt Impact Its P/E Ratio?
Net debt is 33% of Prosperity Bancshares's market cap. You'd want to be aware of this fact, but it doesn't bother us.
The Verdict On Prosperity Bancshares's P/E Ratio
Prosperity Bancshares's P/E is 10.1 which is below average (12.9) in the US market. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment. What can be absolutely certain is that the market has become less optimistic about Prosperity Bancshares over the last month, with the P/E ratio falling from 15.0 back then to 10.1 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.
Investors have an opportunity when market expectations about a stock are wrong. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. 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.
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.
