How Does KBR's (NYSE:KBR) P/E Compare To Its Industry, After The Share Price Drop?

Unfortunately for some shareholders, the KBR (NYSE:KBR) share price has dived 51% in the last thirty days. The recent drop has obliterated the annual return, with the share price now down 17% over that longer period.

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. 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.

View our latest analysis for KBR

Does KBR Have A Relatively High Or Low P/E For Its Industry?

KBR's P/E of 10.79 indicates relatively low sentiment towards the stock. If you look at the image below, you can see KBR has a lower P/E than the average (21.8) in the it industry classification.

This suggests that market participants think KBR will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. 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

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. 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. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

KBR saw earnings per share decrease by 29% last year.

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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. 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).

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

How Does KBR's Debt Impact Its P/E Ratio?

Net debt is 26% of KBR's market cap. While that's enough to warrant consideration, it doesn't really concern us.

The Bottom Line On KBR's P/E Ratio

KBR has a P/E of 10.8. That's around the same as the average in the US market, which is 11.5. Given it has some debt, but didn't grow last year, the P/E indicates the market is expecting higher profits ahead for the business. What can be absolutely certain is that the market has become significantly less optimistic about KBR over the last month, with the P/E ratio falling from 21.9 back then to 10.8 today. 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.

Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

Of course you might be able to find a better stock than KBR. 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.