Yahoo Finance What Is Maxim Integrated Products's (NASDAQ:MXIM) P/E Ratio After Its Share Price Tanked?
To the annoyance of some shareholders, Maxim Integrated Products (NASDAQ:MXIM) shares are down a considerable 30% in the last month. Even longer term holders have taken a real hit with the stock declining 17% 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. 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). 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.
View our latest analysis for Maxim Integrated Products
Does Maxim Integrated Products Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 15.54 that sentiment around Maxim Integrated Products isn't particularly high. If you look at the image below, you can see Maxim Integrated Products has a lower P/E than the average (25.2) in the semiconductor industry classification.
Its relatively low P/E ratio indicates that Maxim Integrated Products shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You 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. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Maxim Integrated Products increased earnings per share by an impressive 12% over the last twelve months. And its annual EPS growth rate over 5 years is 28%. With that performance, you might expect an above average P/E ratio.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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 Maxim Integrated Products's Balance Sheet Tell Us?
Maxim Integrated Products has net cash of US$790m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Verdict On Maxim Integrated Products's P/E Ratio
Maxim Integrated Products has a P/E of 15.5. That's higher than the average in its market, which is 13.3. Its net cash position supports a higher P/E ratio, as does its solid recent earnings growth. So it does not seem strange that the P/E is above average. Given Maxim Integrated Products's P/E ratio has declined from 22.3 to 15.5 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 prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.
Investors should be looking to buy stocks that the market is wrong about. 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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
Of course you might be able to find a better stock than Maxim Integrated Products. So you may wish to see this free collection of other companies that have grown earnings strongly.
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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