J.B. Hunt Transport Services (NASDAQ:JBHT) shareholders are no doubt pleased to see that the share price has bounced 33% in the last month alone, although it is still down 6.2% over the last quarter. The full year gain of 11% is pretty reasonable, too.
All else being equal, a sharp share price increase should make a stock less 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). So some would prefer to hold off buying when there is a lot of optimism towards a stock. 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). 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.
Does J.B. Hunt Transport Services Have A Relatively High Or Low P/E For Its Industry?
J.B. Hunt Transport Services's P/E of 22.88 indicates some degree of optimism towards the stock. The image below shows that J.B. Hunt Transport Services has a higher P/E than the average (18.0) P/E for companies in the transportation industry.
J.B. Hunt Transport Services's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So investors 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. When earnings grow, the 'E' increases, over time. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
J.B. Hunt Transport Services increased earnings per share by 4.5% last year. And it has bolstered its earnings per share by 6.7% per year over the last five years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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.
J.B. Hunt Transport Services's Balance Sheet
Net debt totals just 9.9% of J.B. Hunt Transport Services's market cap. So it doesn't have as many options as it would with net cash, but its debt would not have much of an impact on its P/E ratio.
The Verdict On J.B. Hunt Transport Services's P/E Ratio
J.B. Hunt Transport Services trades on a P/E ratio of 22.9, which is above its market average of 13.6. Given the debt is only modest, and earnings are already moving in the right direction, it's not surprising that the market expects continued improvement. What we know for sure is that investors have become much more excited about J.B. Hunt Transport Services recently, since they have pushed its P/E ratio from 17.1 to 22.9 over the last month. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', 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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
You might be able to find a better buy than J.B. Hunt Transport Services. 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).
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