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How Does Meta Financial Group's (NASDAQ:CASH) P/E Compare To Its Industry, After The Share Price Drop?

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Simply Wall St
·4 min read
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Unfortunately for some shareholders, the Meta Financial Group (NASDAQ:CASH) share price has dived 30% in the last thirty days. Looking back over the last year, the stock has been a solid performer, with a gain of 39%.

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. So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. 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.

View our latest analysis for Meta Financial Group

Does Meta Financial Group Have A Relatively High Or Low P/E For Its Industry?

Meta Financial Group's P/E of 10.04 indicates relatively low sentiment towards the stock. We can see in the image below that the average P/E (12.1) for companies in the mortgage industry is higher than Meta Financial Group's P/E.

NasdaqGS:CASH Price Estimation Relative to Market, March 10th 2020
NasdaqGS:CASH Price Estimation Relative to Market, March 10th 2020

Its relatively low P/E ratio indicates that Meta Financial Group shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or 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. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.

Meta Financial Group increased earnings per share by a whopping 43% last year. And its annual EPS growth rate over 5 years is 26%. I'd therefore be a little surprised if its P/E ratio was not relatively high.

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

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

Is Debt Impacting Meta Financial Group's P/E?

Meta Financial Group has net debt equal to 26% of its market cap. While it's worth keeping this in mind, it isn't a worry.

The Bottom Line On Meta Financial Group's P/E Ratio

Meta Financial Group has a P/E of 10.0. That's below the average in the US market, which is 15.1. The company does have a little debt, and EPS growth was good last year. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue. Since analysts are predicting growth will continue, one might expect to see a higher P/E so it may be worth looking closer. Given Meta Financial Group's P/E ratio has declined from 14.4 to 10.0 in the last month, we know for sure that the market is less confident about the business today, than it was back then. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.

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.

Of course you might be able to find a better stock than Meta Financial Group. 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.