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How Does Pioneer Natural Resources's (NYSE:PXD) P/E Compare To Its Industry, After The Share Price Drop?

To the annoyance of some shareholders, Pioneer Natural Resources (NYSE:PXD) shares are down a considerable 49% in the last month. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 48% drop over twelve months.

Assuming nothing else has changed, a lower share price makes a stock more 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, 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

View our latest analysis for Pioneer Natural Resources

How Does Pioneer Natural Resources's P/E Ratio Compare To Its Peers?

Pioneer Natural Resources's P/E of 15.61 indicates some degree of optimism towards the stock. As you can see below, Pioneer Natural Resources has a higher P/E than the average company (7.5) in the oil and gas industry.

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

Pioneer Natural Resources's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

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. When earnings grow, the 'E' increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Pioneer Natural Resources's earnings per share fell by 21% in the last twelve months. And it has shrunk its earnings per share by 8.8% per year over the last five years. This could justify a pessimistic P/E.

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

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. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

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).

Pioneer Natural Resources's Balance Sheet

Pioneer Natural Resources has net debt worth 13% of its market capitalization. This could bring some additional risk, and reduce the number of investment options for management; worth remembering if you compare its P/E to businesses without debt.

The Verdict On Pioneer Natural Resources's P/E Ratio

Pioneer Natural Resources has a P/E of 15.6. That's around the same as the average in the US market, which is 15.1. With modest debt, and a lack of recent growth, it would seem the market is expecting improvement in earnings. What can be absolutely certain is that the market has become significantly less optimistic about Pioneer Natural Resources over the last month, with the P/E ratio falling from 30.6 back then to 15.6 today. 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.

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 visual report on analyst forecasts could hold the key to an excellent investment decision.

Of course you might be able to find a better stock than Pioneer Natural Resources. 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.

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