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How Does Publicis Groupe's (EPA:PUB) P/E Compare To Its Industry, After The Share Price Drop?

Simply Wall St

Unfortunately for some shareholders, the Publicis Groupe (EPA:PUB) share price has dived 37% in the last thirty days. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 49% drop over twelve months.

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). The implication here is that long term investors have an opportunity when expectations of a company are too low. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.

See our latest analysis for Publicis Groupe

Does Publicis Groupe Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 6.79 that sentiment around Publicis Groupe isn't particularly high. We can see in the image below that the average P/E (9.3) for companies in the media industry is higher than Publicis Groupe's P/E.

ENXTPA:PUB Price Estimation Relative to Market March 27th 2020

This suggests that market participants think Publicis Groupe will underperform other companies in its industry. Since the market seems unimpressed with Publicis Groupe, it's quite possible it could surprise on the upside. 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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Publicis Groupe's earnings per share fell by 10% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 2.2%.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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).

How Does Publicis Groupe's Debt Impact Its P/E Ratio?

Publicis Groupe has net debt equal to 40% of its market cap. While it's worth keeping this in mind, it isn't a worry.

The Verdict On Publicis Groupe's P/E Ratio

Publicis Groupe has a P/E of 6.8. That's below the average in the FR market, which is 13.5. With only modest debt, it's likely the lack of EPS growth at least partially explains the pessimism implied by the P/E ratio. What can be absolutely certain is that the market has become more pessimistic about Publicis Groupe over the last month, with the P/E ratio falling from 10.7 back then to 6.8 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. 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.

You might be able to find a better buy than Publicis Groupe. 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.