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How Does Boston Private Financial Holdings's (NASDAQ:BPFH) P/E Compare To Its Industry, After The Share Price Drop?

Simply Wall St
·4 mins read

Unfortunately for some shareholders, the Boston Private Financial Holdings (NASDAQ:BPFH) share price has dived 53% in the last thirty days. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 50% drop over twelve months.

Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. 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 implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

See our latest analysis for Boston Private Financial Holdings

How Does Boston Private Financial Holdings's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 5.59 that sentiment around Boston Private Financial Holdings isn't particularly high. If you look at the image below, you can see Boston Private Financial Holdings has a lower P/E than the average (8.3) in the banks industry classification.

NasdaqGS:BPFH Price Estimation Relative to Market, March 24th 2020
NasdaqGS:BPFH Price Estimation Relative to Market, March 24th 2020

This suggests that market participants think Boston Private Financial Holdings will underperform other companies in its industry. Since the market seems unimpressed with Boston Private Financial Holdings, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Boston Private Financial Holdings's earnings per share grew by 6.0% in the last twelve months. And earnings per share have improved by 5.5% annually, over the last five years.

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. Thus, the metric does not reflect cash or debt held by the company. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.

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).

Is Debt Impacting Boston Private Financial Holdings's P/E?

Net debt is 46% of Boston Private Financial Holdings's market cap. You'd want to be aware of this fact, but it doesn't bother us.

The Bottom Line On Boston Private Financial Holdings's P/E Ratio

Boston Private Financial Holdings has a P/E of 5.6. That's below the average in the US market, which is 11.5. The company hasn't stretched its balance sheet, and earnings are improving. If you believe growth will continue - or even increase - then the low P/E may signify opportunity. Given Boston Private Financial Holdings's P/E ratio has declined from 11.9 to 5.6 in the last month, we know for sure that the market is more worried about the business today, than it was back then. 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.

Investors have an opportunity when market expectations about a stock are wrong. 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 Boston Private Financial 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.