To the annoyance of some shareholders, Interpublic Group of Companies (NYSE:IPG) shares are down a considerable 30% in the last month. The recent drop has obliterated the annual return, with the share price now down 28% over that longer period.
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. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.
How Does Interpublic Group of Companies’s P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 8.95 that sentiment around Interpublic Group of Companies isn’t particularly high. The image below shows that Interpublic Group of Companies has a lower P/E than the average (10.0) P/E for companies in the media industry.
Interpublic Group of Companies’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 Interpublic Group of Companies, it’s quite possible it could surprise on the upside. 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
Generally speaking the rate of earnings growth has a profound impact on a company’s P/E multiple. 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. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Interpublic Group of Companies saw earnings per share improve by 5.2% last year. And earnings per share have improved by 8.3% annually, over the last five years.
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. 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 spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
So What Does Interpublic Group of Companies’s Balance Sheet Tell Us?
Net debt is 36% of Interpublic Group of Companies’s market cap. While that’s enough to warrant consideration, it doesn’t really concern us.
The Verdict On Interpublic Group of Companies’s P/E Ratio
Interpublic Group of Companies trades on a P/E ratio of 9.0, which is below the US market average of 13.0. EPS grew over the last twelve months, and debt levels are quite reasonable. If you believe growth will continue – or even increase – then the low P/E may signify opportunity. What can be absolutely certain is that the market has become more pessimistic about Interpublic Group of Companies over the last month, with the P/E ratio falling from 12.8 back then to 9.0 today. 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.
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 visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course you might be able to find a better stock than Interpublic Group of Companies. 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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