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How Does Minerals Technologies's (NYSE:MTX) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

Minerals Technologies (NYSE:MTX) shareholders are no doubt pleased to see that the share price has bounced 32% in the last month alone, although it is still down 27% over the last quarter. But shareholders may not all be feeling jubilant, since the share price is still down 30% in the last year.

Assuming no other changes, a sharply higher share price makes a stock less 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 some would prefer to hold off buying when there is a lot of optimism towards a stock. 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 Minerals Technologies

How Does Minerals Technologies's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 11.12 that sentiment around Minerals Technologies isn't particularly high. If you look at the image below, you can see Minerals Technologies has a lower P/E than the average (16.1) in the chemicals industry classification.

NYSE:MTX Price Estimation Relative to Market May 5th 2020

Its relatively low P/E ratio indicates that Minerals Technologies 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

Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Minerals Technologies saw earnings per share decrease by 20% last year. But over the longer term (5 years) earnings per share have increased by 3.6%.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. So it won't reflect the advantage of cash, or disadvantage of debt. 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.

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.

So What Does Minerals Technologies's Balance Sheet Tell Us?

Minerals Technologies has net debt equal to 46% of its market cap. You'd want to be aware of this fact, but it doesn't bother us.

The Verdict On Minerals Technologies's P/E Ratio

Minerals Technologies trades on a P/E ratio of 11.1, which is below the US market average of 14.3. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment. What is very clear is that the market has become more optimistic about Minerals Technologies over the last month, with the P/E ratio rising from 8.4 back then to 11.1 today. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.

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 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 Minerals Technologies. 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.