Unfortunately for some shareholders, the LyondellBasell Industries (NYSE:LYB) share price has dived 47% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 49% in that time.
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). 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 LyondellBasell Industries Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 4.50 that sentiment around LyondellBasell Industries isn’t particularly high. If you look at the image below, you can see LyondellBasell Industries has a lower P/E than the average (13.9) in the chemicals industry classification.
Its relatively low P/E ratio indicates that LyondellBasell Industries shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with LyondellBasell Industries, 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
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the ‘E’ will be higher. 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.
LyondellBasell Industries saw earnings per share decrease by 20% last year. But it has grown its earnings per share by 3.6% per year 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. 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 LyondellBasell Industries’s Balance Sheet Tell Us?
Net debt totals 77% of LyondellBasell Industries’s 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 LyondellBasell Industries’s P/E Ratio
LyondellBasell Industries has a P/E of 4.5. That’s below the average in the US market, which is 12.2. The P/E reflects market pessimism that probably arises from the lack of recent EPS growth, paired with significant leverage. What can be absolutely certain is that the market has become more pessimistic about LyondellBasell Industries over the last month, with the P/E ratio falling from 8.5 back then to 4.5 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for deep value investors this stock might justify some research.
Investors have an opportunity when market expectations about a stock are wrong. 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.
But note: LyondellBasell Industries may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio 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.
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