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Integer Holdings (NYSE:ITGR) shareholders are no doubt pleased to see that the share price has bounced 34% in the last month alone, although it is still down 23% over the last quarter. The bad news is that even after that recovery shareholders are still underwater by about 3.9% for the full year.
Assuming no other changes, a sharply higher share price makes a stock less 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 some would prefer to hold off buying when there is a lot of optimism towards a stock. One way to gauge market expectations of a stock 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.
Does Integer Holdings Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 24.49 that sentiment around Integer Holdings isn't particularly high. We can see in the image below that the average P/E (44.7) for companies in the medical equipment industry is higher than Integer Holdings's P/E.
Its relatively low P/E ratio indicates that Integer Holdings shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
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. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Integer Holdings's earnings made like a rocket, taking off 90% last year. And earnings per share have improved by 51% annually, over the last three years. So you might say it really deserves to have an above-average P/E ratio.
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. That means it doesn't take debt or cash into account. 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.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
Is Debt Impacting Integer Holdings's P/E?
Integer Holdings has net debt equal to 36% of its market cap. While it's worth keeping this in mind, it isn't a worry.
The Bottom Line On Integer Holdings's P/E Ratio
Integer Holdings has a P/E of 24.5. That's higher than the average in its market, which is 13.6. Its debt levels do not imperil its balance sheet and its EPS growth is very healthy indeed. So to be frank we are not surprised it has a high P/E ratio. What is very clear is that the market has become significantly more optimistic about Integer Holdings over the last month, with the P/E ratio rising from 18.3 back then to 24.5 today. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.
When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. 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 Integer 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 firstname.lastname@example.org. 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.
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