Unfortunately for some shareholders, the South Plains Financial (NASDAQ:SPFI) share price has dived 39% in the last thirty days. The bad news is that the recent drop obliterated the last year’s worth of gains; the stock is flat over twelve months.
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. 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 South Plains Financial
Does South Plains Financial Have A Relatively High Or Low P/E For Its Industry?
South Plains Financial’s P/E of 7.07 indicates relatively low sentiment towards the stock. We can see in the image below that the average P/E (8.8) for companies in the banks industry is higher than South Plains Financial’s P/E.
Its relatively low P/E ratio indicates that South Plains Financial shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with South Plains Financial, 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
Generally speaking the rate of earnings growth has a profound impact on a company’s P/E multiple. 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. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
South Plains Financial saw earnings per share decrease by 12% last year. But over the longer term (5 years) earnings per share have increased by 1.7%.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
Don’t forget that the P/E ratio considers market capitalization. So it won’t reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
How Does South Plains Financial’s Debt Impact Its P/E Ratio?
South Plains Financial’s net debt is 21% of its market cap. This could bring some additional risk, and reduce the number of investment options for management; worth remembering if you compare its P/E to businesses without debt.
The Bottom Line On South Plains Financial’s P/E Ratio
South Plains Financial has a P/E of 7.1. That’s below the average in the US market, which is 13.0. With only modest debt, it’s likely the lack of EPS growth at least partially explains the pessimism implied by the P/E ratio. Given South Plains Financial’s P/E ratio has declined from 11.5 to 7.1 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 to invest with the flow of momentum, that might be a bad sign, but for deep value investors this stock might justify some research.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
Of course you might be able to find a better stock than South Plains Financial. 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 firstname.lastname@example.org. 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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