What Is Southwest Gas Holdings's (NYSE:SWX) P/E Ratio After Its Share Price Rocketed?
Southwest Gas Holdings (NYSE:SWX) shareholders are no doubt pleased to see that the share price has had a great month, posting a 49% gain, recovering from prior weakness. The bad news is that even after that recovery shareholders are still underwater by about 5.7% for the full year.
Assuming no other changes, a sharply higher share price makes a stock less 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). The implication here is that deep value investors might steer clear when expectations of a company are too high. 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 Southwest Gas Holdings
Does Southwest Gas Holdings Have A Relatively High Or Low P/E For Its Industry?
Southwest Gas Holdings's P/E of 19.73 indicates relatively low sentiment towards the stock. The image below shows that Southwest Gas Holdings has a lower P/E than the average (21.9) P/E for companies in the gas utilities industry.
Southwest Gas Holdings'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
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 unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Southwest Gas Holdings saw earnings per share improve by 6.9% last year. And earnings per share have improved by 5.4% annually, over the last five years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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.
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 Southwest Gas Holdings's Debt Impact Its P/E Ratio?
Net debt totals 61% of Southwest Gas Holdings's 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 Southwest Gas Holdings's P/E Ratio
Southwest Gas Holdings's P/E is 19.7 which is above average (13.7) in its market. With meaningful debt and only modest recent earnings growth, the market is either expecting reliable long-term growth, or a near-term improvement. What is very clear is that the market has become significantly more optimistic about Southwest Gas Holdings over the last month, with the P/E ratio rising from 13.3 back then to 19.7 today. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.
Investors have an opportunity when market expectations about a stock are wrong. 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 report on the analyst consensus forecasts could help you make a master move on this stock.
But note: Southwest Gas Holdings may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
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.
