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How Does International Bancshares's (NASDAQ:IBOC) P/E Compare To Its Industry, After The Share Price Drop?

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Simply Wall St
·4 min read
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To the annoyance of some shareholders, International Bancshares (NASDAQ:IBOC) shares are down a considerable 54% in the last month. That drop has capped off a tough year for shareholders, with the share price down 51% in that time.

All else being equal, a share price drop should make a stock more attractive to potential investors. 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. 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.

Check out our latest analysis for International Bancshares

How Does International Bancshares's P/E Ratio Compare To Its Peers?

International Bancshares's P/E of 5.88 indicates relatively low sentiment towards the stock. The image below shows that International Bancshares has a lower P/E than the average (8.3) P/E for companies in the banks industry.

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

Its relatively low P/E ratio indicates that International Bancshares shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. 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

Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

International Bancshares's earnings per share fell by 4.1% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 6.5%.

Remember: P/E Ratios Don't Consider The Balance Sheet

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

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).

International Bancshares's Balance Sheet

Net debt totals 79% of International Bancshares's market cap. This is enough debt that you'd have to make some adjustments before using the P/E ratio to compare it to a company with net cash.

The Verdict On International Bancshares's P/E Ratio

International Bancshares's P/E is 5.9 which is below average (11.5) in the US market. The P/E reflects market pessimism that probably arises from the lack of recent EPS growth, paired with significant leverage. Given International Bancshares's P/E ratio has declined from 12.9 to 5.9 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. 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. We don't have analyst forecasts, but you might want to assess this data-rich visualization of earnings, revenue and cash flow.

Of course you might be able to find a better stock than International Bancshares. 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.