How Does Universal Logistics Holdings's (NASDAQ:ULH) P/E Compare To Its Industry, After The Share Price Drop?
To the annoyance of some shareholders, Universal Logistics Holdings (NASDAQ:ULH) shares are down a considerable 38% in the last month. That drop has capped off a tough year for shareholders, with the share price down 45% in that time.
All else being equal, a share price drop should make a stock more attractive to potential investors. 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, 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.
See our latest analysis for Universal Logistics Holdings
Does Universal Logistics Holdings Have A Relatively High Or Low P/E For Its Industry?
Universal Logistics Holdings's P/E of 8.77 indicates relatively low sentiment towards the stock. If you look at the image below, you can see Universal Logistics Holdings has a lower P/E than the average (15.8) in the transportation industry classification.
This suggests that market participants think Universal Logistics Holdings will underperform other companies in its industry. 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
Earnings growth rates have a big influence on P/E ratios. 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. Then, a lower P/E should attract more buyers, pushing the share price up.
Universal Logistics Holdings's earnings per share fell by 27% in the last twelve months. But EPS is up 16% over the last 3 years. And over the longer term (5 years) earnings per share have decreased 2.4% annually. This could justify a pessimistic P/E.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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 Universal Logistics Holdings's P/E?
Universal Logistics Holdings has net debt worth a very significant 112% of its market capitalization. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.
The Verdict On Universal Logistics Holdings's P/E Ratio
Universal Logistics Holdings has a P/E of 8.8. That's below the average in the US market, which is 13.3. When you consider that the company has significant debt, and didn't grow EPS last year, it isn't surprising that the market has muted expectations. What can be absolutely certain is that the market has become more pessimistic about Universal Logistics Holdings over the last month, with the P/E ratio falling from 14.1 back then to 8.8 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 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 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 Universal Logistics Holdings. 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.
