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How Does BankUnited's (NYSE:BKU) P/E Compare To Its Industry, After The Share Price Drop?

Simply Wall St
·4 min read

Unfortunately for some shareholders, the BankUnited (NYSE:BKU) share price has dived 36% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 49% in that time.

All else being equal, a share price drop should make a stock more attractive to potential investors. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. 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.

View our latest analysis for BankUnited

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

BankUnited's P/E of 5.63 indicates relatively low sentiment towards the stock. We can see in the image below that the average P/E (8.6) for companies in the banks industry is higher than BankUnited's P/E.

NYSE:BKU Price Estimation Relative to Market April 7th 2020
NYSE:BKU Price Estimation Relative to Market April 7th 2020

BankUnited's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with BankUnited, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

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.

BankUnited saw earnings per share improve by 4.5% last year. And earnings per share have improved by 10.0% annually, over the last five years.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

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 BankUnited's Balance Sheet Tell Us?

Net debt totals a substantial 296% of BankUnited'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 Bottom Line On BankUnited's P/E Ratio

BankUnited's P/E is 5.6 which is below average (12.5) in the US market. It's good to see EPS growth in the last 12 months, but the debt on the balance sheet might be muting expectations. What can be absolutely certain is that the market has become more pessimistic about BankUnited over the last month, with the P/E ratio falling from 8.8 back then to 5.6 today. For those who prefer invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

You might be able to find a better buy than BankUnited. 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.