U.S. Markets open in 7 hrs 24 mins
  • S&P Futures

    3,450.00
    +17.75 (+0.52%)
     
  • Dow Futures

    28,317.00
    +135.00 (+0.48%)
     
  • Nasdaq Futures

    11,704.75
    +44.00 (+0.38%)
     
  • Russell 2000 Futures

    1,625.00
    +10.20 (+0.63%)
     
  • Crude Oil

    41.51
    +0.05 (+0.12%)
     
  • Gold

    1,920.30
    +4.90 (+0.26%)
     
  • Silver

    25.11
    +0.13 (+0.52%)
     
  • EUR/USD

    1.1850
    +0.0021 (+0.1777%)
     
  • 10-Yr Bond

    0.7970
    0.0000 (0.00%)
     
  • Vix

    29.35
    +0.17 (+0.58%)
     
  • GBP/USD

    1.2978
    +0.0031 (+0.2427%)
     
  • USD/JPY

    105.2830
    -0.1870 (-0.1773%)
     
  • BTC-USD

    12,249.54
    +1,192.53 (+10.79%)
     
  • CMC Crypto 200

    245.89
    +6.97 (+2.92%)
     
  • FTSE 100

    5,889.22
    +4.57 (+0.08%)
     
  • Nikkei 225

    23,648.62
    +81.58 (+0.35%)
     

Despite Its High P/E Ratio, Is TowneBank (NASDAQ:TOWN) Still Undervalued?

Simply Wall St
·4 mins read

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to TowneBank's (NASDAQ:TOWN), to help you decide if the stock is worth further research. TowneBank has a price to earnings ratio of 14.25, based on the last twelve months. That means that at current prices, buyers pay $14.25 for every $1 in trailing yearly profits.

View our latest analysis for TowneBank

How Do You Calculate A P/E Ratio?

The formula for P/E is:

Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for TowneBank:

P/E of 14.25 = USD27.50 ÷ USD1.93 (Based on the year to December 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each USD1 the company has earned over the last year. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price'.

How Does TowneBank's P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (12.6) for companies in the banks industry is lower than TowneBank's P/E.

NasdaqGS:TOWN Price Estimation Relative to Market, February 19th 2020
NasdaqGS:TOWN Price Estimation Relative to Market, February 19th 2020

That means that the market expects TowneBank will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. 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. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.

TowneBank's earnings per share grew by -2.6% in the last twelve months. And earnings per share have improved by 10% annually, over the last five 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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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 TowneBank's Debt Impact Its P/E Ratio?

Net debt is 30% of TowneBank's market cap. While it's worth keeping this in mind, it isn't a worry.

The Verdict On TowneBank's P/E Ratio

TowneBank has a P/E of 14.2. That's below the average in the US market, which is 18.3. EPS grew over the last twelve months, and debt levels are quite reasonable. The P/E ratio implies the market is cautious about longer term prospects.

When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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 TowneBank. 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.

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.