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How Does Willamette Valley Vineyards's (NASDAQ:WVVI) P/E Compare To Its Industry, After The Share Price Drop?

·4 min read

To the annoyance of some shareholders, Willamette Valley Vineyards (NASDAQ:WVVI) shares are down a considerable 32% in the last month. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 35% 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). 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 Willamette Valley Vineyards

How Does Willamette Valley Vineyards's P/E Ratio Compare To Its Peers?

Willamette Valley Vineyards's P/E of 15.55 indicates relatively low sentiment towards the stock. If you look at the image below, you can see Willamette Valley Vineyards has a lower P/E than the average (25.1) in the beverage industry classification.

NasdaqCM:WVVI Price Estimation Relative to Market, March 18th 2020
NasdaqCM:WVVI Price Estimation Relative to Market, March 18th 2020

Willamette Valley Vineyards's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.

Willamette Valley Vineyards shrunk earnings per share by 19% over the last year. And over the longer term (5 years) earnings per share have decreased 7.7% annually. This could justify a pessimistic P/E.

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

The 'Price' in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

So What Does Willamette Valley Vineyards's Balance Sheet Tell Us?

Willamette Valley Vineyards's net debt is 3.0% of its market cap. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.

The Bottom Line On Willamette Valley Vineyards's P/E Ratio

Willamette Valley Vineyards trades on a P/E ratio of 15.5, which is above its market average of 12.8. With some debt but no EPS growth last year, the market has high expectations of future profits. Given Willamette Valley Vineyards's P/E ratio has declined from 22.9 to 15.5 in the last month, we know for sure that the market is significantly less confident about the business today, than it was back then. 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. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. We don't have analyst forecasts, but you might want to assess this data-rich visualization of earnings, revenue and cash flow.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

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.