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How Does M&T Bank's (NYSE:MTB) P/E Compare To Its Industry, After The Share Price Drop?

Simply Wall St
·4 min read

To the annoyance of some shareholders, M&T Bank (NYSE:MTB) shares are down a considerable 36% in the last month. That drop has capped off a tough year for shareholders, with the share price down 36% in that time.

All else being equal, a share price drop should make a stock more attractive to potential investors. 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. 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). 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 M&T Bank

Does M&T Bank Have A Relatively High Or Low P/E For Its Industry?

M&T Bank's P/E of 7.89 indicates relatively low sentiment towards the stock. The image below shows that M&T Bank has a lower P/E than the average (10.5) P/E for companies in the banks industry.

NYSE:MTB Price Estimation Relative to Market, March 10th 2020
NYSE:MTB Price Estimation Relative to Market, March 10th 2020

M&T Bank's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with M&T Bank, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. 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.

M&T Bank increased earnings per share by 7.9% last year. And it has bolstered its earnings per share by 13% per year over the last five years.

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. That means it doesn't take debt or cash into account. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on 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.

Is Debt Impacting M&T Bank's P/E?

Since M&T Bank holds net cash of US$1.3b, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Verdict On M&T Bank's P/E Ratio

M&T Bank's P/E is 7.9 which is below average (15.1) in the US market. EPS was up modestly better over the last twelve months. And the healthy balance sheet means the company can sustain growth while the P/E suggests shareholders don't think it will. Given M&T Bank's P/E ratio has declined from 12.4 to 7.9 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 invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.

Investors should be looking to buy stocks that the market is wrong about. 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 report on the analyst consensus forecasts could help you make a master move on this stock.

Of course you might be able to find a better stock than M&T Bank. 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.