Those holding L3Harris Technologies (NYSE:LHX) shares must be pleased that the share price has rebounded 32% in the last thirty days. But unfortunately, the stock is still down by 7.2% over a quarter. The full year gain of 23% is pretty reasonable, too.
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. 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.
How Does L3Harris Technologies's P/E Ratio Compare To Its Peers?
L3Harris Technologies's P/E of 27.35 indicates some degree of optimism towards the stock. The image below shows that L3Harris Technologies has a higher P/E than the average (15.0) P/E for companies in the aerospace & defense industry.
L3Harris Technologies's P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn't guarantee future growth. So further research is always essential. I often monitor director buying and 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. 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.
L3Harris Technologies maintained roughly steady earnings over the last twelve months. But over the longer term (5 years) earnings per share have increased by 7.8%.
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. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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.
How Does L3Harris Technologies's Debt Impact Its P/E Ratio?
L3Harris Technologies has net debt worth 14% of its market capitalization. That's enough debt to impact the P/E ratio a little; so keep it in mind if you're comparing it to companies without debt.
The Bottom Line On L3Harris Technologies's P/E Ratio
L3Harris Technologies trades on a P/E ratio of 27.3, which is above its market average of 13.6. With debt at prudent levels and improving earnings, it's fair to say the market expects steady progress in the future. What is very clear is that the market has become significantly more optimistic about L3Harris Technologies over the last month, with the P/E ratio rising from 20.7 back then to 27.3 today. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.
Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. 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 L3Harris Technologies. 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 email@example.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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