To the annoyance of some shareholders, Sensata Technologies Holding (NYSE:ST) shares are down a considerable 33% in the last month. The recent drop has obliterated the annual return, with the share price now down 30% 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. 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). 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 Sensata Technologies Holding Have A Relatively High Or Low P/E For Its Industry?
Sensata Technologies Holding’s P/E of 19.12 indicates some degree of optimism towards the stock. As you can see below, Sensata Technologies Holding has a higher P/E than the average company (16.7) in the electrical industry.
Its relatively high P/E ratio indicates that Sensata Technologies Holding shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn’t guarantee future growth. So further research is always essential. 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. 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. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Sensata Technologies Holding’s earnings per share fell by 51% in the last twelve months. But it has grown its earnings per share by 1.0% per year over the last five years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
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.
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 Sensata Technologies Holding’s P/E?
Sensata Technologies Holding has net debt equal to 47% of its market cap. While that’s enough to warrant consideration, it doesn’t really concern us.
The Verdict On Sensata Technologies Holding’s P/E Ratio
Sensata Technologies Holding has a P/E of 19.1. That’s higher than the average in its market, which is 13.3. With some debt but no EPS growth last year, the market has high expectations of future profits. Given Sensata Technologies Holding’s P/E ratio has declined from 28.3 to 19.1 in the last month, we know for sure that the market is significantly less confident about the business today, than it was back then. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.
Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. 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 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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