Yahoo Finance How Does Hawaiian Holdings's (NASDAQ:HA) P/E Compare To Its Industry, After The Share Price Drop?
Unfortunately for some shareholders, the Hawaiian Holdings (NASDAQ:HA) share price has dived 31% in the last thirty days. Even longer term holders have taken a real hit with the stock declining 27% 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). 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.
See our latest analysis for Hawaiian Holdings
Does Hawaiian Holdings Have A Relatively High Or Low P/E For Its Industry?
Hawaiian Holdings's P/E of 4.06 indicates relatively low sentiment towards the stock. The image below shows that Hawaiian Holdings has a lower P/E than the average (6.4) P/E for companies in the airlines industry.
Its relatively low P/E ratio indicates that Hawaiian Holdings shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Hawaiian Holdings, it's quite possible it could surprise on the upside. 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
P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Hawaiian Holdings had pretty flat EPS growth in the last year. But over the longer term (5 years) earnings per share have increased by 30%.
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. 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 Hawaiian Holdings's P/E?
Since Hawaiian Holdings holds net cash of US$18m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Bottom Line On Hawaiian Holdings's P/E Ratio
Hawaiian Holdings has a P/E of 4.1. That's below the average in the US market, which is 16.6. Earnings improved over the last year. And the net cash position gives the company many options. So it's strange that the low P/E indicates low expectations. Given Hawaiian Holdings's P/E ratio has declined from 5.8 to 4.1 in the last month, we know for sure that the market is more worried about the business today, than it was back then. For those who prefer invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.
When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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 Hawaiian Holdings. 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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