It's really great to see that even after a strong run, Preformed Line Products (NASDAQ:PLPC) shares have been powering on, with a gain of 32% in the last thirty days. The full year gain of 13% is pretty reasonable, too.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). 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.
Does Preformed Line Products Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 15.84 that sentiment around Preformed Line Products isn't particularly high. The image below shows that Preformed Line Products has a lower P/E than the average (17.6) P/E for companies in the electrical industry.
Preformed Line Products'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 Preformed Line Products, it's quite possible it could surprise on the upside. 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
Earnings growth rates have a big influence on P/E ratios. 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. Then, a lower P/E should attract more buyers, pushing the share price up.
Preformed Line Products saw earnings per share improve by -4.5% last year. And its annual EPS growth rate over 5 years is 13%.
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. So it won't reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
How Does Preformed Line Products's Debt Impact Its P/E Ratio?
Net debt totals just 6.1% of Preformed Line Products's 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 Verdict On Preformed Line Products's P/E Ratio
Preformed Line Products has a P/E of 15.8. That's below the average in the US market, which is 18.4. The company hasn't stretched its balance sheet, and earnings are improving. If growth is sustainable over the long term, then the current P/E ratio may be a sign of good value. What we know for sure is that investors have become more excited about Preformed Line Products recently, since they have pushed its P/E ratio from 12.0 to 15.8 over the last month. 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. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. Although we don't have analyst forecasts you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
Of course you might be able to find a better stock than Preformed Line Products. 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 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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