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How Does Biglari Holdings's (NYSE:BH.A) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

The Biglari Holdings (NYSE:BH.A) share price has done well in the last month, posting a gain of 34%. But shareholders may not all be feeling jubilant, since the share price is still down 22% in the last year.

All else being equal, a sharp share price increase should make a stock less 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). The implication here is that deep value investors might steer clear when expectations of a company are too high. Perhaps the simplest way to get a read on investors' expectations of a business 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.

Check out our latest analysis for Biglari Holdings

Does Biglari Holdings Have A Relatively High Or Low P/E For Its Industry?

Biglari Holdings's P/E of 2.71 indicates relatively low sentiment towards the stock. The image below shows that Biglari Holdings has a lower P/E than the average (22.0) P/E for companies in the hospitality industry.

NYSE:BH.A Price Estimation Relative to Market, November 22nd 2019

This suggests that market participants think Biglari Holdings will underperform other companies in its industry. Since the market seems unimpressed with Biglari Holdings, 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

Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the 'E' increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Biglari Holdings's earnings made like a rocket, taking off 63% last year. The cherry on top is that the five year growth rate was an impressive 66% per year. So I'd be surprised if the P/E ratio was not above average.

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

Don't forget that the P/E ratio considers market capitalization. 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.

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 Biglari Holdings's Debt Impact Its P/E Ratio?

Biglari Holdings's net debt equates to 35% of its market capitalization. While that's enough to warrant consideration, it doesn't really concern us.

The Verdict On Biglari Holdings's P/E Ratio

Biglari Holdings has a P/E of 2.7. That's below the average in the US market, which is 18.0. The EPS growth last year was strong, and debt levels are quite reasonable. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue. What we know for sure is that investors are becoming less uncomfortable about Biglari Holdings's prospects, since they have pushed its P/E ratio from 2.0 to 2.7 over the last month. For those who like to invest in turnarounds, that might mean it's time to put the stock on a watchlist, or research it. But others might consider the opportunity to have passed.

Investors have an opportunity when market expectations about a stock are wrong. 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. Although we don't have analyst forecasts you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

You might be able to find a better buy than Biglari Holdings. 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.