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How Does UPM-Kymmene Oyj's (HEL:UPM) P/E Compare To Its Industry, After The Share Price Drop?

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To the annoyance of some shareholders, UPM-Kymmene Oyj (HEL:UPM) shares are down a considerable 30% in the last month. The recent drop has obliterated the annual return, with the share price now down 22% over that longer period.

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). So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. One way to gauge market expectations of a stock 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.

Check out our latest analysis for UPM-Kymmene Oyj

How Does UPM-Kymmene Oyj's P/E Ratio Compare To Its Peers?

UPM-Kymmene Oyj's P/E of 10.58 indicates some degree of optimism towards the stock. The image below shows that UPM-Kymmene Oyj has a higher P/E than the average (8.8) P/E for companies in the forestry industry.

HLSE:UPM Price Estimation Relative to Market, March 19th 2020
HLSE:UPM Price Estimation Relative to Market, March 19th 2020

That means that the market expects UPM-Kymmene Oyj will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.

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. Earnings growth means that in the future the 'E' will be higher. 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.

UPM-Kymmene Oyj saw earnings per share decrease by 29% last year. But EPS is up 16% over the last 5 years.

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

The 'Price' in P/E reflects the market capitalization of the company. 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.

How Does UPM-Kymmene Oyj's Debt Impact Its P/E Ratio?

The extra options and safety that comes with UPM-Kymmene Oyj's €823m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.

The Verdict On UPM-Kymmene Oyj's P/E Ratio

UPM-Kymmene Oyj has a P/E of 10.6. That's below the average in the FI market, which is 14.7. The recent drop in earnings per share would make investors cautious, but the net cash position means the company has time to improve: if so, the low P/E could be an opportunity. Given UPM-Kymmene Oyj's P/E ratio has declined from 15.1 to 10.6 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 don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.

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 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 UPM-Kymmene Oyj. 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.