How Does Southern Missouri Bancorp’s (NASDAQ:SMBC) P/E Compare To Its Industry, After The Share Price Drop?

To the annoyance of some shareholders, Southern Missouri Bancorp (NASDAQ:SMBC) shares are down a considerable 32% in the last month. The recent drop has obliterated the annual return, with the share price now down 26% over that longer period.

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. The implication here is that long term investors have an opportunity when expectations of a company are too low. 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.

View our latest analysis for Southern Missouri Bancorp

How Does Southern Missouri Bancorp’s P/E Ratio Compare To Its Peers?

Southern Missouri Bancorp’s P/E of 7.68 indicates relatively low sentiment towards the stock. We can see in the image below that the average P/E (10.9) for companies in the mortgage industry is higher than Southern Missouri Bancorp’s P/E.

NasdaqGM:SMBC Price Estimation Relative to Market, March 13th 2020
NasdaqGM:SMBC Price Estimation Relative to Market, March 13th 2020

This suggests that market participants think Southern Missouri Bancorp will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

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. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Southern Missouri Bancorp increased earnings per share by an impressive 16% over the last twelve months. And earnings per share have improved by 14% annually, over the last five years. This could arguably justify a relatively high P/E ratio.

Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits

The ‘Price’ in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

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.

So What Does Southern Missouri Bancorp’s Balance Sheet Tell Us?

Net debt is 38% of Southern Missouri Bancorp’s market cap. You’d want to be aware of this fact, but it doesn’t bother us.

The Verdict On Southern Missouri Bancorp’s P/E Ratio

Southern Missouri Bancorp has a P/E of 7.7. That’s below the average in the US market, which is 13.3. The company does have a little debt, and EPS growth was good last year. If it continues to grow, then the current low P/E may prove to be unjustified. Given Southern Missouri Bancorp’s P/E ratio has declined from 11.2 to 7.7 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. 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 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.