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How Does Great Lakes Dredge & Dock's (NASDAQ:GLDD) P/E Compare To Its Industry, After The Share Price Drop?

Simply Wall St

To the annoyance of some shareholders, Great Lakes Dredge & Dock (NASDAQ:GLDD) shares are down a considerable 34% in the last month. The recent drop has obliterated the annual return, with the share price now down 19% over that longer period.

Assuming nothing else has changed, a lower share price makes a stock more 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. So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

View our latest analysis for Great Lakes Dredge & Dock

How Does Great Lakes Dredge & Dock's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 7.75 that sentiment around Great Lakes Dredge & Dock isn't particularly high. The image below shows that Great Lakes Dredge & Dock has a lower P/E than the average (10.9) P/E for companies in the construction industry.

NasdaqGS:GLDD Price Estimation Relative to Market, March 13th 2020

Great Lakes Dredge & Dock's P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.

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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Great Lakes Dredge & Dock's 395% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive. 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.

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

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

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

So What Does Great Lakes Dredge & Dock's Balance Sheet Tell Us?

Great Lakes Dredge & Dock has net debt equal to 31% of its market cap. You'd want to be aware of this fact, but it doesn't bother us.

The Verdict On Great Lakes Dredge & Dock's P/E Ratio

Great Lakes Dredge & Dock trades on a P/E ratio of 7.7, which is below the US market average of 13.3. The company does have a little debt, and EPS growth was good last year. If it continues to grow, then the current low P/E may prove to be unjustified. Given Great Lakes Dredge & Dock's P/E ratio has declined from 11.7 to 7.7 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 to invest with the flow of momentum, that might be a bad sign, but for deep value investors this stock might justify some research.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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 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 Great Lakes Dredge & Dock. 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.