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How Does MasterCraft Boat Holdings's (NASDAQ:MCFT) P/E Compare To Its Industry, After The Share Price Drop?

·4 min read

To the annoyance of some shareholders, MasterCraft Boat Holdings (NASDAQ:MCFT) shares are down a considerable 69% in the last month. And that drop will have no doubt have some shareholders concerned that the 73% share price decline, over the last year, has turned them into bagholders. For those wondering, a bagholder is someone who keeps holding a losing stock indefinitely, without taking the time to consider its prospects carefully, going forward.

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). 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). 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 MasterCraft Boat Holdings

Does MasterCraft Boat Holdings Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 6.08 that sentiment around MasterCraft Boat Holdings isn't particularly high. The image below shows that MasterCraft Boat Holdings has a lower P/E than the average (11.7) P/E for companies in the leisure industry.

NasdaqGM:MCFT Price Estimation Relative to Market, March 24th 2020
NasdaqGM:MCFT Price Estimation Relative to Market, March 24th 2020

MasterCraft Boat Holdings's P/E tells us that market participants think it will not fare as well as its peers in the same industry. 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

If earnings fall then in the future the 'E' will be lower. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

MasterCraft Boat Holdings's earnings per share fell by 58% in the last twelve months. And over the longer term (5 years) earnings per share have decreased 13% annually. This might lead to muted expectations.

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

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.

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).

How Does MasterCraft Boat Holdings's Debt Impact Its P/E Ratio?

MasterCraft Boat Holdings's net debt is 78% of its market cap. This is a reasonably significant level of debt -- all else being equal you'd expect a much lower P/E than if it had net cash.

The Bottom Line On MasterCraft Boat Holdings's P/E Ratio

MasterCraft Boat Holdings's P/E is 6.1 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. What can be absolutely certain is that the market has become more pessimistic about MasterCraft Boat Holdings over the last month, with the P/E ratio falling from 19.6 back then to 6.1 today. 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 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 MasterCraft Boat Holdings. 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.