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A Sliding Share Price Has Us Looking At US Foods Holding Corp.'s (NYSE:USFD) P/E Ratio

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Simply Wall St
·4 min read
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Unfortunately for some shareholders, the US Foods Holding (NYSE:USFD) share price has dived 34% in the last thirty days. Even longer term holders have taken a real hit with the stock declining 24% in the last year.

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. 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). 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 US Foods Holding

Does US Foods Holding Have A Relatively High Or Low P/E For Its Industry?

US Foods Holding's P/E of 14.86 indicates relatively low sentiment towards the stock. If you look at the image below, you can see US Foods Holding has a lower P/E than the average (17.0) in the consumer retailing industry classification.

NYSE:USFD Price Estimation Relative to Market, March 12th 2020
NYSE:USFD Price Estimation Relative to Market, March 12th 2020

US Foods Holding'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

Probably the most important factor in determining what P/E a company trades on is the earnings growth. 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. Then, a lower P/E should attract more buyers, pushing the share price up.

US Foods Holding shrunk earnings per share by 6.7% last year. But it has grown its earnings per share by 19% per year over the last three years.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

The 'Price' in P/E reflects the market capitalization of the company. 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).

Is Debt Impacting US Foods Holding's P/E?

US Foods Holding's net debt is 78% of its market cap. This is enough debt that you'd have to make some adjustments before using the P/E ratio to compare it to a company with net cash.

The Bottom Line On US Foods Holding's P/E Ratio

US Foods Holding's P/E is 14.9 which is about average (14.7) in the US market. With significant debt and no EPS growth last year, the P/E suggests shareholders are expecting higher profit in the future. Given US Foods Holding's P/E ratio has declined from 22.5 to 14.9 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 have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

You might be able to find a better buy than US Foods Holding. 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.