To the annoyance of some shareholders, Amkor Technology (NASDAQ:AMKR) shares are down a considerable 35% in the last month. The bad news is that the recent drop obliterated the last year’s worth of gains; the stock is flat over twelve months.
Assuming nothing else has changed, a lower share price makes a stock more 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, 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.
How Does Amkor Technology’s P/E Ratio Compare To Its Peers?
Amkor Technology’s P/E of 17.17 indicates relatively low sentiment towards the stock. The image below shows that Amkor Technology has a lower P/E than the average (28.8) P/E for companies in the semiconductor industry.
Its relatively low P/E ratio indicates that Amkor Technology 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
If earnings fall then in the future the ‘E’ will be lower. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Amkor Technology’s earnings per share fell by 5.0% in the last twelve months. And it has shrunk its earnings per share by 2.1% per year over the last five years. So we might expect a relatively low P/E.
Remember: P/E Ratios Don’t Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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 Amkor Technology’s Balance Sheet Tell Us?
Amkor Technology’s net debt equates to 27% of its market capitalization. While that’s enough to warrant consideration, it doesn’t really concern us.
The Bottom Line On Amkor Technology’s P/E Ratio
Amkor Technology trades on a P/E ratio of 17.2, which is above its market average of 14.7. With some debt but no EPS growth last year, the market has high expectations of future profits. What can be absolutely certain is that the market has become significantly less optimistic about Amkor Technology over the last month, with the P/E ratio falling from 26.3 back then to 17.2 today. For those who don’t like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.
When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
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 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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