Unfortunately for some shareholders, the Installed Building Products (NYSE:IBP) share price has dived 37% in the last thirty days. Even longer term holders have taken a real hit with the stock declining 7.7% in the last year.
Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. 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. 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 ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.
How Does Installed Building Products's P/E Ratio Compare To Its Peers?
Installed Building Products's P/E of 19.39 indicates some degree of optimism towards the stock. As you can see below, Installed Building Products has a higher P/E than the average company (7.9) in the consumer durables industry.
That means that the market expects Installed Building Products will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. 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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
Installed Building Products increased earnings per share by a whopping 30% last year. And it has improved its earnings per share by 23% per year over the last three years. With that performance, I would expect it to have an above average P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. 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).
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.
Is Debt Impacting Installed Building Products's P/E?
Installed Building Products's net debt equates to 27% of its market capitalization. You'd want to be aware of this fact, but it doesn't bother us.
The Verdict On Installed Building Products's P/E Ratio
Installed Building Products has a P/E of 19.4. That's higher than the average in its market, which is 12.6. While the company does use modest debt, its recent earnings growth is superb. So on this analysis a high P/E ratio seems reasonable. Given Installed Building Products's P/E ratio has declined from 30.8 to 19.4 in the last month, we know for sure that the market is significantly less confident about the business today, than it was back then. For those who don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.
Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. 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.
Of course you might be able to find a better stock than Installed Building 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 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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