To the annoyance of some shareholders, Robert Half International (NYSE:RHI) shares are down a considerable 31% in the last month. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 36% drop over twelve months.
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. The implication here is that long term investors have an opportunity when expectations of a company are too low. 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). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
Does Robert Half International Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 10.55 that sentiment around Robert Half International isn't particularly high. We can see in the image below that the average P/E (12.7) for companies in the professional services industry is higher than Robert Half International's P/E.
Robert Half International's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Robert Half International, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Robert Half International saw earnings per share improve by 9.0% last year. And it has bolstered its earnings per share by 12% per year over the last five years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
So What Does Robert Half International's Balance Sheet Tell Us?
Robert Half International has net cash of US$270m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Bottom Line On Robert Half International's P/E Ratio
Robert Half International has a P/E of 10.5. That's below the average in the US market, which is 12.8. Recent earnings growth wasn't bad. And the healthy balance sheet means the company can sustain growth while the P/E suggests shareholders don't think it will. What can be absolutely certain is that the market has become less optimistic about Robert Half International over the last month, with the P/E ratio falling from 15.3 back then to 10.5 today. 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 have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
Of course you might be able to find a better stock than Robert Half International. So you may wish to see this free collection of other companies that have grown earnings strongly.
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