Yahoo Finance How Does Simpson Manufacturing's (NYSE:SSD) P/E Compare To Its Industry, After The Share Price Drop?
Unfortunately for some shareholders, the Simpson Manufacturing (NYSE:SSD) share price has dived 32% in the last thirty days. The recent drop has obliterated the annual return, with the share price now down 8.9% over that longer period.
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. The implication here is that long term investors have an opportunity when expectations of a company are too low. 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 Simpson Manufacturing
How Does Simpson Manufacturing's P/E Ratio Compare To Its Peers?
Simpson Manufacturing's P/E of 18.89 indicates some degree of optimism towards the stock. As you can see below, Simpson Manufacturing has a higher P/E than the average company (13.7) in the building industry.
Simpson Manufacturing's P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. 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.
Simpson Manufacturing increased earnings per share by 9.3% last year. And earnings per share have improved by 18% annually, over the last five years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. 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).
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.
Simpson Manufacturing's Balance Sheet
Since Simpson Manufacturing holds net cash of US$230m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Verdict On Simpson Manufacturing's P/E Ratio
Simpson Manufacturing's P/E is 18.9 which is above average (12.2) in its market. EPS was up modestly better over the last twelve months. Also positive, the relatively strong balance sheet will allow for investment in growth -- and the P/E indicates shareholders that will happen! What can be absolutely certain is that the market has become significantly less optimistic about Simpson Manufacturing over the last month, with the P/E ratio falling from 27.6 back then to 18.9 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.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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 report on the analyst consensus forecasts could help you make a master move on this stock.
But note: Simpson Manufacturing 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.
