Yahoo Finance How Does Amdocs's (NASDAQ:DOX) P/E Compare To Its Industry, After The Share Price Drop?
To the annoyance of some shareholders, Amdocs (NASDAQ:DOX) shares are down a considerable 34% in the last month. The recent drop has obliterated the annual return, with the share price now down 11% over that longer period.
All else being equal, a share price drop should make a stock more attractive to potential investors. 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 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.
View our latest analysis for Amdocs
How Does Amdocs's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 13.48 that sentiment around Amdocs isn't particularly high. If you look at the image below, you can see Amdocs has a lower P/E than the average (22.0) in the it industry classification.
Its relatively low P/E ratio indicates that Amdocs shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. 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. 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.
Amdocs's earnings made like a rocket, taking off 51% last year. Having said that, if we look back three years, EPS growth has averaged a comparatively less impressive 9.8%.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
How Does Amdocs's Debt Impact Its P/E Ratio?
The extra options and safety that comes with Amdocs's US$486m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Bottom Line On Amdocs's P/E Ratio
Amdocs trades on a P/E ratio of 13.5, which is above its market average of 11.8. Its net cash position is the cherry on top of its superb EPS growth. So based on this analysis we'd expect Amdocs to have a high P/E ratio. What can be absolutely certain is that the market has become significantly less optimistic about Amdocs over the last month, with the P/E ratio falling from 20.3 back then to 13.5 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.
Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. 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 Amdocs. 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.
