A Rising Share Price Has Us Looking Closely At Bio-Rad Laboratories, Inc.'s (NYSE:BIO) P/E Ratio
Bio-Rad Laboratories (NYSE:BIO) shares have had a really impressive month, gaining 34%, after some slippage. And the full year gain of 45% isn't too shabby, either!
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. The implication here is that deep value investors might steer clear when expectations of a company are too high. 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 ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.
View our latest analysis for Bio-Rad Laboratories
Does Bio-Rad Laboratories Have A Relatively High Or Low P/E For Its Industry?
Bio-Rad Laboratories's P/E of 7.35 indicates relatively low sentiment towards the stock. The image below shows that Bio-Rad Laboratories has a lower P/E than the average (31.2) P/E for companies in the life sciences industry.
Bio-Rad Laboratories's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Bio-Rad Laboratories, it's quite possible it could surprise on the upside. 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
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Bio-Rad Laboratories's 381% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive. The cherry on top is that the five year growth rate was an impressive 80% per year. With that kind of growth rate we would generally expect a high P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
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. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
Bio-Rad Laboratories's Balance Sheet
Since Bio-Rad Laboratories holds net cash of US$687m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Verdict On Bio-Rad Laboratories's P/E Ratio
Bio-Rad Laboratories has a P/E of 7.3. That's below the average in the US market, which is 13.5. The net cash position gives plenty of options to the business, and the recent improvement in EPS is good to see. The below average P/E ratio suggests that market participants don't believe the strong growth will continue. What we know for sure is that investors are becoming less uncomfortable about Bio-Rad Laboratories's prospects, since they have pushed its P/E ratio from 5.5 to 7.3 over the last month. For those who like to invest in turnarounds, that might mean it's time to put the stock on a watchlist, or research it. But others might consider the opportunity to have passed.
Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
You might be able to find a better buy than Bio-Rad Laboratories. 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.
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