Yahoo Finance How Does Rexnord's (NYSE:RXN) P/E Compare To Its Industry, After Its Big Share Price Gain?
Those holding Rexnord (NYSE:RXN) shares must be pleased that the share price has rebounded 35% in the last thirty days. But unfortunately, the stock is still down by 16% over a quarter. The bad news is that even after that recovery shareholders are still underwater by about 6.1% for the full year.
Assuming no other changes, a sharply higher share price makes a stock less 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. So some would prefer to hold off buying when there is a lot of optimism towards a stock. 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.
See our latest analysis for Rexnord
Does Rexnord Have A Relatively High Or Low P/E For Its Industry?
Rexnord's P/E is 16.20. You can see in the image below that the average P/E (17.4) for companies in the machinery industry is roughly the same as Rexnord's P/E.
Rexnord's P/E tells us that market participants think its prospects are roughly in line with its industry. If the company has better than average prospects, then the market might be underestimating it. I would further inform my view by checking insider buying and selling., among other things.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
Rexnord maintained roughly steady earnings over the last twelve months. But EPS is up 13% over the last 5 years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. 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).
Rexnord's Balance Sheet
Rexnord's net debt equates to 25% of its market capitalization. While that's enough to warrant consideration, it doesn't really concern us.
The Verdict On Rexnord's P/E Ratio
Rexnord has a P/E of 16.2. That's higher than the average in its market, which is 14.9. With some debt but no EPS growth last year, the market has high expectations of future profits. What is very clear is that the market has become more optimistic about Rexnord over the last month, with the P/E ratio rising from 12.0 back then to 16.2 today. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.
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 report on the analyst consensus forecasts could help you make a master move on this stock.
Of course you might be able to find a better stock than Rexnord. 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.
