Yahoo Finance How Does Michaels Companies's (NASDAQ:MIK) P/E Compare To Its Industry, After Its Big Share Price Gain?
Michaels Companies (NASDAQ:MIK) shareholders are no doubt pleased to see that the share price has bounced 30% in the last month alone, although it is still down 6.7% over the last quarter. But shareholders may not all be feeling jubilant, since the share price is still down 44% in the last 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). So some would prefer to hold off buying when there is a lot of optimism towards a stock. 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.
See our latest analysis for Michaels Companies
How Does Michaels Companies's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 5.00 that sentiment around Michaels Companies isn't particularly high. If you look at the image below, you can see Michaels Companies has a lower P/E than the average (16.7) in the specialty retail industry classification.
Its relatively low P/E ratio indicates that Michaels Companies shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Michaels Companies, 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. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.
Michaels Companies's earnings per share fell by 9.5% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 11%.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
So What Does Michaels Companies's Balance Sheet Tell Us?
Michaels Companies has net debt worth a very significant 201% of its market capitalization. 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 Bottom Line On Michaels Companies's P/E Ratio
Michaels Companies trades on a P/E ratio of 5.0, which is below the US market average of 18.8. The P/E reflects market pessimism that probably arises from the lack of recent EPS growth, paired with significant leverage. What is very clear is that the market has become less pessimistic about Michaels Companies over the last month, with the P/E ratio rising from 3.8 back then to 5.0 today. If you like to buy stocks that could be turnaround opportunities, then this one might be a candidate; but if you're more sensitive to price, then you may feel the opportunity has passed.
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 Michaels Companies. 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.
