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A Sliding Share Price Has Us Looking At Bloomin' Brands, Inc.'s (NASDAQ:BLMN) P/E Ratio

Simply Wall St

Unfortunately for some shareholders, the Bloomin' Brands (NASDAQ:BLMN) share price has dived 34% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 33% in that time.

All else being equal, a share price drop should make a stock more 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, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. 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.

Check out our latest analysis for Bloomin' Brands

How Does Bloomin' Brands's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 9.18 that sentiment around Bloomin' Brands isn't particularly high. The image below shows that Bloomin' Brands has a lower P/E than the average (16.1) P/E for companies in the hospitality industry.

NasdaqGS:BLMN Price Estimation Relative to Market, March 10th 2020
NasdaqGS:BLMN Price Estimation Relative to Market, March 10th 2020

Its relatively low P/E ratio indicates that Bloomin' Brands shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Bloomin' Brands, 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

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. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Bloomin' Brands increased earnings per share by a whopping 26% last year. And earnings per share have improved by 15% annually, over the last five years. I'd therefore be a little surprised if its P/E ratio was not relatively high.

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

The 'Price' in P/E reflects the market capitalization of the company. 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 expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

So What Does Bloomin' Brands's Balance Sheet Tell Us?

Bloomin' Brands's net debt is 87% of its market cap. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.

The Bottom Line On Bloomin' Brands's P/E Ratio

Bloomin' Brands's P/E is 9.2 which is below average (15.1) in the US market. The company may have significant debt, but EPS growth was good last year. If it continues to grow, then the current low P/E may prove to be unjustified. Given Bloomin' Brands's P/E ratio has declined from 13.8 to 9.2 in the last month, we know for sure that the market is more worried about the business today, than it was back then. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for deep value investors this stock might justify some research.

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 visual report on analyst forecasts could hold the key to an excellent investment decision.

Of course you might be able to find a better stock than Bloomin' Brands. 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 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.