How Does Charles River Laboratories International's (NYSE:CRL) P/E Compare To Its Industry, After Its Big Share Price Gain?
Those holding Charles River Laboratories International (NYSE:CRL) shares must be pleased that the share price has rebounded 33% in the last thirty days. But unfortunately, the stock is still down by 13% over a quarter. Unfortunately, the full year gain of 4.4% wasn't so sweet.
Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. The implication here is that deep value investors might steer clear when expectations of a company are too high. 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.
View our latest analysis for Charles River Laboratories International
How Does Charles River Laboratories International's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 26.96 that sentiment around Charles River Laboratories International isn't particularly high. If you look at the image below, you can see Charles River Laboratories International has a lower P/E than the average (31.5) in the life sciences industry classification.
Its relatively low P/E ratio indicates that Charles River Laboratories International shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Charles River Laboratories International, 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. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Charles River Laboratories International increased earnings per share by an impressive 11% over the last twelve months. And it has bolstered its earnings per share by 13% per year over the last five years. This could arguably justify a relatively high P/E ratio.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
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. 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 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.
Charles River Laboratories International's Balance Sheet
Charles River Laboratories International's net debt is 23% of its market cap. This could bring some additional risk, and reduce the number of investment options for management; worth remembering if you compare its P/E to businesses without debt.
The Verdict On Charles River Laboratories International's P/E Ratio
Charles River Laboratories International's P/E is 27.0 which is above average (13.5) in its market. The company is not overly constrained by its modest debt levels, and its recent EPS growth very solid. Therefore, it's not particularly surprising that it has a above average P/E ratio. What we know for sure is that investors have become much more excited about Charles River Laboratories International recently, since they have pushed its P/E ratio from 20.2 to 27.0 over the last month. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.
Investors have an opportunity when market expectations about a stock are wrong. 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 visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course you might be able to find a better stock than Charles River Laboratories International. 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.
