A Sliding Share Price Has Us Looking At Owens Corning’s (NYSE:OC) P/E Ratio

To the annoyance of some shareholders, Owens Corning (NYSE:OC) shares are down a considerable 47% in the last month. The recent drop has obliterated the annual return, with the share price now down 25% over that longer period.

Assuming nothing else has changed, a lower share price makes a stock more 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, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. One way to gauge market expectations of a stock 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.

Check out our latest analysis for Owens Corning

How Does Owens Corning’s P/E Ratio Compare To Its Peers?

Owens Corning’s P/E of 9.38 indicates relatively low sentiment towards the stock. If you look at the image below, you can see Owens Corning has a lower P/E than the average (16.5) in the building industry classification.

NYSE:OC Price Estimation Relative to Market, March 20th 2020
NYSE:OC Price Estimation Relative to Market, March 20th 2020

Owens Corning’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Owens Corning, 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

Earnings growth rates have a big influence on P/E ratios. When earnings grow, the ‘E’ increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.

Owens Corning saw earnings per share decrease by 25% last year. But it has grown its earnings per share by 14% per year over the last five years.

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. 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.

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.

Is Debt Impacting Owens Corning’s P/E?

Owens Corning’s net debt is 75% of its market cap. This is enough debt that you’d have to make some adjustments before using the P/E ratio to compare it to a company with net cash.

The Verdict On Owens Corning’s P/E Ratio

Owens Corning’s P/E is 9.4 which is below average (12.2) in the US market. Given meaningful debt, and a lack of recent growth, the market looks to be extrapolating this recent performance; reflecting low expectations for the future. Given Owens Corning’s P/E ratio has declined from 17.7 to 9.4 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.

Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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 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.