U.S. markets closed
  • S&P 500

    3,465.39
    +11.90 (+0.34%)
     
  • Dow 30

    28,335.57
    -28.13 (-0.10%)
     
  • Nasdaq

    11,548.28
    +42.28 (+0.37%)
     
  • Russell 2000

    1,640.50
    +10.25 (+0.63%)
     
  • Crude Oil

    39.78
    -0.07 (-0.18%)
     
  • Gold

    1,903.40
    -1.80 (-0.09%)
     
  • Silver

    24.70
    +0.03 (+0.10%)
     
  • EUR/USD

    1.1860
    +0.0034 (+0.28%)
     
  • 10-Yr Bond

    0.8410
    -0.0070 (-0.83%)
     
  • GBP/USD

    1.3059
    -0.0021 (-0.16%)
     
  • USD/JPY

    104.7130
    -0.1270 (-0.12%)
     
  • BTC-USD

    13,042.83
    +25.30 (+0.19%)
     
  • CMC Crypto 200

    260.05
    -1.40 (-0.54%)
     
  • FTSE 100

    5,860.28
    +74.63 (+1.29%)
     
  • Nikkei 225

    23,516.59
    +42.29 (+0.18%)
     

Despite Its High P/E Ratio, Is Pioneer Natural Resources Company (NYSE:PXD) Still Undervalued?

Simply Wall St

Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. To keep it practical, we'll show how Pioneer Natural Resources Company's (NYSE:PXD) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, Pioneer Natural Resources has a P/E ratio of 35.11. In other words, at today's prices, investors are paying $35.11 for every $1 in prior year profit.

See our latest analysis for Pioneer Natural Resources

How Do You Calculate Pioneer Natural Resources's P/E Ratio?

The formula for price to earnings is:

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

Or for Pioneer Natural Resources:

P/E of 35.11 = $152.08 ÷ $4.33 (Based on the trailing twelve months to September 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

How Does Pioneer Natural Resources's P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. As you can see below, Pioneer Natural Resources has a much higher P/E than the average company (10.9) in the oil and gas industry.

NYSE:PXD Price Estimation Relative to Market, January 9th 2020
NYSE:PXD Price Estimation Relative to Market, January 9th 2020

Pioneer Natural Resources's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Pioneer Natural Resources shrunk earnings per share by 44% over the last year.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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 spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

How Does Pioneer Natural Resources's Debt Impact Its P/E Ratio?

Net debt totals just 6.7% of Pioneer Natural Resources's market cap. So it doesn't have as many options as it would with net cash, but its debt would not have much of an impact on its P/E ratio.

The Bottom Line On Pioneer Natural Resources's P/E Ratio

Pioneer Natural Resources's P/E is 35.1 which is above average (18.8) in its market. With a bit of debt, but a lack of recent growth, it's safe to say the market is expecting improved profit performance from the company, in the next few years.

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. 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 Pioneer Natural Resources. 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.