Despite Its High P/E Ratio, Is Community Bank System, Inc. (NYSE:CBU) Still Undervalued?

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Community Bank System, Inc.’s (NYSE:CBU) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, Community Bank System’s P/E ratio is 19.52. In other words, at today’s prices, investors are paying $19.52 for every $1 in prior year profit.

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How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Community Bank System:

P/E of 19.52 = $64.6 ÷ $3.31 (Based on the year to March 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each $1 the company has earned over the last year. That isn’t a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.

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 unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Community Bank System had pretty flat EPS growth in the last year. But EPS is up 11% over the last 5 years.

How Does Community Bank System’s P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. As you can see below, Community Bank System has a higher P/E than the average company (12.8) in the banks industry.

NYSE:CBU Price Estimation Relative to Market, May 21st 2019
NYSE:CBU Price Estimation Relative to Market, May 21st 2019

Community Bank System’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. 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.

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. Thus, the metric does not reflect cash or debt held by the company. 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.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

Is Debt Impacting Community Bank System’s P/E?

The extra options and safety that comes with Community Bank System’s US$123m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.

The Bottom Line On Community Bank System’s P/E Ratio

Community Bank System has a P/E of 19.5. That’s higher than the average in the US market, which is 17.7. EPS was up modestly better over the last twelve months. And the net cash position provides the company with multiple options. The high P/E suggests the market thinks further growth will come.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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.

But note: Community Bank System 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).

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.

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. Thank you for reading.