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What Is Lakeland Bancorp's (NASDAQ:LBAI) P/E Ratio After Its Share Price Tanked?

Simply Wall St
·4 mins read

Unfortunately for some shareholders, the Lakeland Bancorp (NASDAQ:LBAI) share price has dived 40% in the last thirty days. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 36% drop over twelve months.

All else being equal, a share price drop should make a stock more attractive to potential investors. 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. The implication here is that long term investors have an opportunity when expectations of a company are too low. 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.

View our latest analysis for Lakeland Bancorp

How Does Lakeland Bancorp's P/E Ratio Compare To Its Peers?

Lakeland Bancorp's P/E of 7.22 indicates relatively low sentiment towards the stock. We can see in the image below that the average P/E (9.4) for companies in the banks industry is higher than Lakeland Bancorp's P/E.

NasdaqGS:LBAI Price Estimation Relative to Market, March 17th 2020
NasdaqGS:LBAI Price Estimation Relative to Market, March 17th 2020

This suggests that market participants think Lakeland Bancorp will underperform other companies in its industry. Since the market seems unimpressed with Lakeland Bancorp, 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

Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Lakeland Bancorp increased earnings per share by 5.1% last year. And it has bolstered its earnings per share by 11% per year over the last five years.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn't take debt or cash into account. 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.

Is Debt Impacting Lakeland Bancorp's P/E?

Net debt totals 65% of Lakeland Bancorp's market cap. This is a reasonably significant level of debt -- all else being equal you'd expect a much lower P/E than if it had net cash.

The Verdict On Lakeland Bancorp's P/E Ratio

Lakeland Bancorp trades on a P/E ratio of 7.2, which is below the US market average of 12.7. While the recent EPS growth is a positive, the significant amount of debt on the balance sheet may be contributing to pessimistic market expectations. What can be absolutely certain is that the market has become more pessimistic about Lakeland Bancorp over the last month, with the P/E ratio falling from 12.0 back then to 7.2 today. For those who prefer invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.

Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

But note: Lakeland Bancorp may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio 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.