What Is Constellation Brands's (NYSE:STZ) P/E Ratio After Its Share Price Tanked?

To the annoyance of some shareholders, Constellation Brands (NYSE:STZ) shares are down a considerable 34% in the last month. Even longer term holders have taken a real hit with the stock declining 23% in the last year.

All else being equal, a share price drop should make a stock more attractive to potential investors. 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). 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.

See our latest analysis for Constellation Brands

How Does Constellation Brands's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 30.33 that there is some investor optimism about Constellation Brands. You can see in the image below that the average P/E (27.8) for companies in the beverage industry is lower than Constellation Brands's P/E.

Constellation Brands's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

How Growth Rates Impact P/E Ratios

When earnings fall, the 'E' decreases, over time. 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.

Constellation Brands shrunk earnings per share by 73% over the last year. But EPS is up 1.2% over the last 5 years. And over the longer term (3 years) earnings per share have decreased 13% annually. This could justify a low P/E.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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 Constellation Brands's P/E?

Constellation Brands's net debt equates to 49% of its market capitalization. You'd want to be aware of this fact, but it doesn't bother us.

The Verdict On Constellation Brands's P/E Ratio

Constellation Brands's P/E is 30.3 which is above average (13.3) in its market. With a bit of debt, but a lack of recent growth, it's safe to say the market is expecting improved profit performance from the company, in the next few years. Given Constellation Brands's P/E ratio has declined from 45.9 to 30.3 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 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. 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 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 Constellation Brands. 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 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.

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. Thank you for reading.