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How Does Eagle Bancorp Montana's (NASDAQ:EBMT) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St
·4 min read

Eagle Bancorp Montana (NASDAQ:EBMT) shareholders are no doubt pleased to see that the share price has bounced 31% in the last month alone, although it is still down 27% over the last quarter. The bad news is that even after that recovery shareholders are still underwater by about 3.9% for the full year.

All else being equal, a sharp share price increase should make a stock less attractive to potential investors. 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. So some would prefer to hold off buying when there is a lot of optimism towards a stock. 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 Eagle Bancorp Montana

How Does Eagle Bancorp Montana's P/E Ratio Compare To Its Peers?

Eagle Bancorp Montana's P/E of 9.68 indicates some degree of optimism towards the stock. As you can see below, Eagle Bancorp Montana has a higher P/E than the average company (8.9) in the banks industry.

NasdaqGM:EBMT Price Estimation Relative to Market April 18th 2020
NasdaqGM:EBMT Price Estimation Relative to Market April 18th 2020

Eagle Bancorp Montana's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.

Eagle Bancorp Montana's earnings made like a rocket, taking off 84% last year. The sweetener is that the annual five year growth rate of 20% is also impressive. With that kind of growth rate we would generally expect a high P/E ratio.

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

The 'Price' in P/E reflects the market capitalization of the company. 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).

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).

So What Does Eagle Bancorp Montana's Balance Sheet Tell Us?

Eagle Bancorp Montana has net debt worth 84% of its market capitalization. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.

The Bottom Line On Eagle Bancorp Montana's P/E Ratio

Eagle Bancorp Montana trades on a P/E ratio of 9.7, which is below the US market average of 13.6. While the EPS growth last year was strong, the significant debt levels reduce the number of options available to management. If the company can continue to grow earnings, then the current P/E may be unjustifiably low. What we know for sure is that investors are becoming less uncomfortable about Eagle Bancorp Montana's prospects, since they have pushed its P/E ratio from 7.4 to 9.7 over the last month. If you like to buy stocks that could be turnaround opportunities, then this one might be a candidate; but if you're more sensitive to price, then you may feel the opportunity has 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. 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 Eagle Bancorp Montana. 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.