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A Sliding Share Price Has Us Looking At The Greenbrier Companies, Inc.'s (NYSE:GBX) P/E Ratio

Simply Wall St

Unfortunately for some shareholders, the Greenbrier Companies (NYSE:GBX) share price has dived 31% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 52% in that time.

All else being equal, a share price drop should make a stock more 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, 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). 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.

View our latest analysis for Greenbrier Companies

Does Greenbrier Companies Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 9.70 that sentiment around Greenbrier Companies isn't particularly high. The image below shows that Greenbrier Companies has a lower P/E than the average (17.7) P/E for companies in the machinery industry.

NYSE:GBX Price Estimation Relative to Market, March 10th 2020

This suggests that market participants think Greenbrier Companies will underperform other companies in its industry. Since the market seems unimpressed with Greenbrier Companies, 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

If earnings fall then in the future the 'E' will be lower. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Greenbrier Companies's earnings per share fell by 59% in the last twelve months. And over the longer term (5 years) earnings per share have decreased 17% annually. This might lead to muted expectations.

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

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. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

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).

How Does Greenbrier Companies's Debt Impact Its P/E Ratio?

Greenbrier Companies's net debt is considerable, at 101% of its market cap. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you're comparing it to other stocks.

The Bottom Line On Greenbrier Companies's P/E Ratio

Greenbrier Companies has a P/E of 9.7. That's below the average in the US market, which is 15.1. Given meaningful debt, and a lack of recent growth, the market looks to be extrapolating this recent performance; reflecting low expectations for the future. What can be absolutely certain is that the market has become more pessimistic about Greenbrier Companies over the last month, with the P/E ratio falling from 14.1 back then to 9.7 today. For those who prefer invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.

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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

You might be able to find a better buy than Greenbrier Companies. 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 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.