It’s great to see Manhattan Associates (NASDAQ:MANH) shareholders have their patience rewarded with a 32% share price pop in the last month. Looking back a bit further, we’re also happy to report the stock is up 81% in the last year.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. 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 some would prefer to hold off buying when there is a lot of optimism towards a stock. 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 Manhattan Associates’s P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 59.8 that there is some investor optimism about Manhattan Associates. The image below shows that Manhattan Associates has a higher P/E than the average (55.5) P/E for companies in the software industry.
Its relatively high P/E ratio indicates that Manhattan Associates shareholders think it will perform better than other companies in its industry classification.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. 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.
Manhattan Associates’s earnings per share fell by 6.6% in the last twelve months. But EPS is up 8.2% over the last 5 years. And it has shrunk its earnings per share by 2.3% per year over the last three years. This growth rate might warrant a low P/E ratio. So we might expect a relatively low P/E.
Remember: P/E Ratios Don’t Consider The Balance Sheet
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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 Manhattan Associates’s Balance Sheet Tell Us?
Manhattan Associates has net cash of US$126m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Verdict On Manhattan Associates’s P/E Ratio
Manhattan Associates’s P/E is 59.8 which suggests the market is more focussed on the future opportunity rather than the current level of earnings. The recent drop in earnings per share might keep value investors away, but the healthy balance sheet means the company retains potential for future growth. If fails to eventuate, the current high P/E could prove to be temporary, as the share price falls. What is very clear is that the market has become significantly more optimistic about Manhattan Associates over the last month, with the P/E ratio rising from 45.2 back then to 59.8 today. For those who prefer to invest with the flow of momentum, that might mean it’s time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.
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.
You might be able to find a better buy than Manhattan Associates. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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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. Thank you for reading.