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How Does Mesa Air Group's (NASDAQ:MESA) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

Mesa Air Group (NASDAQ:MESA) shareholders are no doubt pleased to see that the share price has had a great month, posting a 30% gain, recovering from prior weakness. The bad news is that even after that recovery shareholders are still underwater by about 9.5% for the full year.

Assuming no other changes, a sharply higher share price makes a stock less 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 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

View our latest analysis for Mesa Air Group

Does Mesa Air Group Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 3.73 that sentiment around Mesa Air Group isn't particularly high. The image below shows that Mesa Air Group has a lower P/E than the average (8.8) P/E for companies in the airlines industry.

NasdaqGS:MESA Price Estimation Relative to Market, December 12th 2019

Mesa Air Group'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 Mesa Air Group, it's quite possible it could surprise on the upside. 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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Mesa Air Group's 160% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive. Even better, EPS is up 17% per year over three years. So we'd absolutely expect it to have a relatively high P/E ratio.

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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.

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).

Mesa Air Group's Balance Sheet

Mesa Air Group's net debt is considerable, at 272% of its market cap. If you want to compare its P/E ratio to other companies, you must keep in mind that these debt levels would usually warrant a relatively low P/E.

The Bottom Line On Mesa Air Group's P/E Ratio

Mesa Air Group's P/E is 3.7 which is below average (18.4) in the US market. While the EPS growth last year was strong, the significant debt levels reduce the number of options available to management. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue. What is very clear is that the market has become less pessimistic about Mesa Air Group over the last month, with the P/E ratio rising from 2.9 back then to 3.7 today. For those who like to invest in turnarounds, that might mean it's time to put the stock on a watchlist, or research it. But others might consider the opportunity to have passed.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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 report on the analyst consensus forecasts could help you make a master move on this stock.

You might be able to find a better buy than Mesa Air Group. 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).

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.