Those holding WPX Energy (NYSE:WPX) shares must be pleased that the share price has rebounded 38% in the last thirty days. But unfortunately, the stock is still down by 68% over a quarter. However, that doesn't change the fact that longer term shareholders might have been mercilessly wrecked by the 73% share price decline throughout the year.
All else being equal, a sharp share price increase should make a stock less 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. 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.
How Does WPX Energy's P/E Ratio Compare To Its Peers?
WPX Energy's P/E of 6.55 indicates relatively low sentiment towards the stock. If you look at the image below, you can see WPX Energy has a lower P/E than the average (8.3) in the oil and gas industry classification.
WPX Energy's P/E tells us that market participants think it will not fare as well as its peers in the same industry. 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
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. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
WPX Energy saw earnings per share improve by 7.1% last year. In contrast, EPS has decreased by 13%, annually, over 5 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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).
So What Does WPX Energy's Balance Sheet Tell Us?
Net debt totals 95% of WPX Energy'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 Bottom Line On WPX Energy's P/E Ratio
WPX Energy trades on a P/E ratio of 6.6, which is below the US market average of 13.5. It's good to see EPS growth in the last 12 months, but the debt on the balance sheet might be muting expectations. What we know for sure is that investors are becoming less uncomfortable about WPX Energy's prospects, since they have pushed its P/E ratio from 4.7 to 6.6 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 have an opportunity when market expectations about a stock are wrong. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
But note: WPX Energy 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 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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