Yahoo Finance How Does Bayerische Motoren Werke's (ETR:BMW) P/E Compare To Its Industry, After The Share Price Drop?
To the annoyance of some shareholders, Bayerische Motoren Werke (ETR:BMW) shares are down a considerable 32% in the last month. That drop has capped off a tough year for shareholders, with the share price down 40% in that time.
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.
View our latest analysis for Bayerische Motoren Werke
Does Bayerische Motoren Werke Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 6.04 that sentiment around Bayerische Motoren Werke isn't particularly high. If you look at the image below, you can see Bayerische Motoren Werke has a lower P/E than the average (8.7) in the auto industry classification.
Bayerische Motoren Werke's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Bayerische Motoren Werke, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
When earnings fall, the 'E' decreases, over time. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
Bayerische Motoren Werke saw earnings per share decrease by 43% last year. And over the longer term (5 years) earnings per share have decreased 3.8% annually. This might lead to muted expectations.
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. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
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.
Bayerische Motoren Werke's Balance Sheet
Bayerische Motoren Werke's net debt is considerable, at 296% of its market cap. If you want to compare its P/E ratio to other companies, you must keep in mind that these debt levels would usually warrant a relatively low P/E.
The Verdict On Bayerische Motoren Werke's P/E Ratio
Bayerische Motoren Werke trades on a P/E ratio of 6.0, which is below the DE market average of 16.8. The P/E reflects market pessimism that probably arises from the lack of recent EPS growth, paired with significant leverage. What can be absolutely certain is that the market has become more pessimistic about Bayerische Motoren Werke over the last month, with the P/E ratio falling from 8.8 back then to 6.0 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for deep value investors this stock might justify some research.
Investors have an opportunity when market expectations about a stock are wrong. 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 report on the analyst consensus forecasts could help you make a master move on this stock.
You might be able to find a better buy than Bayerische Motoren Werke. 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.
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