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How Does Home Bancorp's (NASDAQ:HBCP) P/E Compare To Its Industry, After The Share Price Drop?

Simply Wall St
·4 min read

Unfortunately for some shareholders, the Home Bancorp (NASDAQ:HBCP) share price has dived 31% in the last thirty days. Even longer term holders have taken a real hit with the stock declining 28% in the last year.

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). The implication here is that long term investors have an opportunity when expectations of a company are too low. 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.

Check out our latest analysis for Home Bancorp

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

We can tell from its P/E ratio of 8.14 that sentiment around Home Bancorp isn't particularly high. The image below shows that Home Bancorp has a lower P/E than the average (12.1) P/E for companies in the mortgage industry.

NasdaqGS:HBCP Price Estimation Relative to Market, March 10th 2020
NasdaqGS:HBCP Price Estimation Relative to Market, March 10th 2020

Its relatively low P/E ratio indicates that Home Bancorp shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Home Bancorp, 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

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. 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.

Home Bancorp shrunk earnings per share by 12% over the last year. But over the longer term (5 years) earnings per share have increased by 15%.

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

Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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.

Is Debt Impacting Home Bancorp's P/E?

Home Bancorp's net debt is 2.5% of its market cap. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.

The Bottom Line On Home Bancorp's P/E Ratio

Home Bancorp trades on a P/E ratio of 8.1, which is below the US market average of 15.1. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment. Given Home Bancorp's P/E ratio has declined from 11.8 to 8.1 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.

Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

But note: Home Bancorp may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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.