XPO Logistics (NYSE:XPO) shareholders are no doubt pleased to see that the share price has bounced 42% in the last month alone, although it is still down 22% over the last quarter. However, the annual gain of 7.8% wasn’t so impressive.
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. 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.
Does XPO Logistics Have A Relatively High Or Low P/E For Its Industry?
XPO Logistics’s P/E of 17.50 indicates relatively low sentiment towards the stock. If you look at the image below, you can see XPO Logistics has a lower P/E than the average (19.7) in the logistics industry classification.
Its relatively low P/E ratio indicates that XPO Logistics shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. 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. Then, a lower P/E should attract more buyers, pushing the share price up.
XPO Logistics increased earnings per share by an impressive 25% over the last twelve months. And its annual EPS growth rate over 3 years is 90%. With that performance, you might expect an above average P/E ratio.
Remember: P/E Ratios Don’t Consider The Balance Sheet
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. So it won’t reflect the advantage of cash, or disadvantage of debt. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
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 XPO Logistics’s Balance Sheet Tell Us?
XPO Logistics has net debt worth 73% of its market capitalization. This is a reasonably significant level of debt — all else being equal you’d expect a much lower P/E than if it had net cash.
The Verdict On XPO Logistics’s P/E Ratio
XPO Logistics trades on a P/E ratio of 17.5, which is above its market average of 14.9. It’s good to see the recent earnings growth, although we note the company uses debt already. It seems the market believes growth will continue, judging by the P/E ratio. What is very clear is that the market has become significantly more optimistic about XPO Logistics over the last month, with the P/E ratio rising from 12.3 back then to 17.5 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. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. 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 find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
If you spot an error that warrants correction, please contact the editor at email@example.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.