To the annoyance of some shareholders, JM (STO:JM) shares are down a considerable 42% in the last month. Even longer term holders have taken a real hit with the stock declining 2.9% in the last year.
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. 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.
Does JM Have A Relatively High Or Low P/E For Its Industry?
JM's P/E of 8.03 indicates relatively low sentiment towards the stock. The image below shows that JM has a lower P/E than the average (9.0) P/E for companies in the consumer durables industry.
Its relatively low P/E ratio indicates that JM shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with JM, 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
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. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
JM saw earnings per share improve by 7.1% last year. And it has bolstered its earnings per share by 5.1% per year over the last five years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
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.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
Is Debt Impacting JM's P/E?
JM's net debt equates to 29% of its market capitalization. While that's enough to warrant consideration, it doesn't really concern us.
The Bottom Line On JM's P/E Ratio
JM has a P/E of 8.0. That's below the average in the SE market, which is 13.8. The company does have a little debt, and EPS is moving in the right direction. If you believe growth will continue - or even increase - then the low P/E may signify opportunity. Given JM's P/E ratio has declined from 13.8 to 8.0 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 invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.
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. 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.
Of course you might be able to find a better stock than JM. So you may wish to see this free collection of other companies that have grown earnings strongly.
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