Unfortunately for some shareholders, the Ingredion (NYSE:INGR) share price has dived 37% in the last thirty days. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 36% drop over twelve months.
Assuming nothing else has changed, a lower share price makes a stock more 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 long term investors have an opportunity when expectations of a company are too low. 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 Ingredion's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 9.85 that sentiment around Ingredion isn't particularly high. If you look at the image below, you can see Ingredion has a lower P/E than the average (19.5) in the food industry classification.
This suggests that market participants think Ingredion will underperform other companies in its 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
When earnings fall, the 'E' decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
Ingredion's earnings per share fell by 1.2% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 5.1%. And EPS is down 2.7% a year, over the last 3 years. So you wouldn't expect a very high P/E.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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.
Ingredion's Balance Sheet
Ingredion's net debt equates to 39% of its market capitalization. While it's worth keeping this in mind, it isn't a worry.
The Bottom Line On Ingredion's P/E Ratio
Ingredion trades on a P/E ratio of 9.8, which is below the US market average of 11.8. With only modest debt, it's likely the lack of EPS growth at least partially explains the pessimism implied by the P/E ratio. What can be absolutely certain is that the market has become more pessimistic about Ingredion over the last month, with the P/E ratio falling from 15.6 back then to 9.8 today. 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 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 report on the analyst consensus forecasts could help you make a master move on this stock.
Of course you might be able to find a better stock than Ingredion. 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 firstname.lastname@example.org. 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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