Yahoo Finance A Sliding Share Price Has Us Looking At ABM Industries Incorporated's (NYSE:ABM) P/E Ratio
Unfortunately for some shareholders, the ABM Industries (NYSE:ABM) share price has dived 38% in the last thirty days. Even longer term holders have taken a real hit with the stock declining 30% 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 ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.
Check out our latest analysis for ABM Industries
Does ABM Industries Have A Relatively High Or Low P/E For Its Industry?
ABM Industries's P/E of 11.33 indicates relatively low sentiment towards the stock. If you look at the image below, you can see ABM Industries has a lower P/E than the average (23.4) in the commercial services industry classification.
This suggests that market participants think ABM Industries will underperform other companies in its industry. Since the market seems unimpressed with ABM Industries, 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. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
ABM Industries's 74% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive. And earnings per share have improved by 23% annually, over the last three years. So you might say it really deserves to have 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.
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.
So What Does ABM Industries's Balance Sheet Tell Us?
ABM Industries's net debt equates to 50% of its market capitalization. While that's enough to warrant consideration, it doesn't really concern us.
The Verdict On ABM Industries's P/E Ratio
ABM Industries's P/E is 11.3 which is below average (13.3) in the US market. The company does have a little debt, and EPS growth was good last year. If it continues to grow, then the current low P/E may prove to be unjustified. What can be absolutely certain is that the market has become significantly less optimistic about ABM Industries over the last month, with the P/E ratio falling from 18.4 back then to 11.3 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. 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 visual report on analyst forecasts could hold the key to an excellent investment decision.
You might be able to find a better buy than ABM Industries. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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.
