Yahoo Finance A Sliding Share Price Has Us Looking At James Hardie Industries plc's (ASX:JHX) P/E Ratio
Unfortunately for some shareholders, the James Hardie Industries (ASX:JHX) share price has dived 33% in the last thirty days. The stock has been solid, longer term, gaining 14% 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
Check out our latest analysis for James Hardie Industries
How Does James Hardie Industries's P/E Ratio Compare To Its Peers?
James Hardie Industries's P/E is 23.74. The image below shows that James Hardie Industries has a P/E ratio that is roughly in line with the basic materials industry average (24.0).
That indicates that the market expects James Hardie Industries will perform roughly in line with other companies in its industry. So if James Hardie Industries actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
It's nice to see that James Hardie Industries grew EPS by a stonking 38% in the last year. And earnings per share have improved by 25% annually, over the last five years. With that performance, I would expect it to have an above average P/E ratio. Unfortunately, earnings per share are down 3.2% a year, over 3 years.
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. 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.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
How Does James Hardie Industries's Debt Impact Its P/E Ratio?
James Hardie Industries has net debt worth 20% of its market capitalization. This could bring some additional risk, and reduce the number of investment options for management; worth remembering if you compare its P/E to businesses without debt.
The Bottom Line On James Hardie Industries's P/E Ratio
James Hardie Industries has a P/E of 23.7. That's higher than the average in its market, which is 14.9. While the company does use modest debt, its recent earnings growth is superb. So to be frank we are not surprised it has a high P/E ratio. What can be absolutely certain is that the market has become significantly less optimistic about James Hardie Industries over the last month, with the P/E ratio falling from 35.3 back then to 23.7 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 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.
But note: James Hardie Industries 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.
