CenterPoint Energy (NYSE:CNP) shareholders are no doubt pleased to see that the share price has bounced 36% in the last month alone, although it is still down 37% over the last quarter. But shareholders may not all be feeling jubilant, since the share price is still down 43% in the last year.
All else being equal, a sharp share price increase should make a stock less 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. So some would prefer to hold off buying when there is a lot of optimism towards a stock. 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.
Does CenterPoint Energy Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 12.66 that sentiment around CenterPoint Energy isn't particularly high. If you look at the image below, you can see CenterPoint Energy has a lower P/E than the average (20.6) in the integrated utilities industry classification.
This suggests that market participants think CenterPoint Energy will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. 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. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
In the last year, CenterPoint Energy grew EPS like Taylor Swift grew her fan base back in 2010; the 81% gain was both fast and well deserved. Having said that, the average EPS growth over the last three years wasn't so good, coming in at 10%. Regrettably, the longer term performance is poor, with EPS down 1.1% per year over 5 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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 CenterPoint Energy's Balance Sheet Tell Us?
Net debt totals a substantial 164% of CenterPoint Energy's market cap. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.
The Verdict On CenterPoint Energy's P/E Ratio
CenterPoint Energy has a P/E of 12.7. That's around the same as the average in the US market, which is 13.7. It does have enough debt to add risk, although earnings growth was strong in the last year. However, the P/E ratio implies that most doubt the strong growth will continue. What we know for sure is that investors have become more excited about CenterPoint Energy recently, since they have pushed its P/E ratio from 9.3 to 12.7 over the last month. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.
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 CenterPoint Energy. 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 email@example.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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