Yahoo Finance How Does Héroux-Devtek's (TSE:HRX) P/E Compare To Its Industry, After The Share Price Drop?
To the annoyance of some shareholders, Héroux-Devtek (TSE:HRX) shares are down a considerable 47% in the last month. That drop has capped off a tough year for shareholders, with the share price down 34% in that time.
All else being equal, a share price drop should make a stock more attractive to potential investors. 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. So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
View our latest analysis for Héroux-Devtek
Does Héroux-Devtek Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 11.19 that sentiment around Héroux-Devtek isn't particularly high. The image below shows that Héroux-Devtek has a lower P/E than the average (12.6) P/E for companies in the aerospace & defense industry.
This suggests that market participants think Héroux-Devtek will underperform other companies in its industry. Since the market seems unimpressed with Héroux-Devtek, 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
P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the 'E' will be higher. 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.
In the last year, Héroux-Devtek grew EPS like Taylor Swift grew her fan base back in 2010; the 69% gain was both fast and well deserved. The sweetener is that the annual five year growth rate of 39% is also impressive. With that kind of growth rate we would generally expect a high P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
Héroux-Devtek's Balance Sheet
Héroux-Devtek has net debt worth 55% of its market capitalization. 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 Héroux-Devtek's P/E Ratio
Héroux-Devtek trades on a P/E ratio of 11.2, which is above its market average of 10.1. Its meaningful level of debt should warrant a lower P/E ratio, but the fast EPS growth is a positive. So despite the debt it is, perhaps, not unreasonable to see a high P/E ratio. What can be absolutely certain is that the market has become significantly less optimistic about Héroux-Devtek over the last month, with the P/E ratio falling from 21.0 back then to 11.2 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. 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 visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course you might be able to find a better stock than Héroux-Devtek. 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 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.
