Unfortunately for some shareholders, the UGI (NYSE:UGI) share price has dived 36% in the last thirty days. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 51% drop over twelve months.
All else being equal, a share price drop should make a stock more 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, 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.
How Does UGI’s P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 12.37 that sentiment around UGI isn’t particularly high. We can see in the image below that the average P/E (19.5) for companies in the gas utilities industry is higher than UGI’s P/E.
This suggests that market participants think UGI will underperform other companies in its industry. Since the market seems unimpressed with UGI, it’s quite possible it could surprise on the upside. 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
If earnings fall then in the future the ‘E’ will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.
UGI saw earnings per share decrease by 9.9% last year. But EPS is up 8.4% over the last 5 years. And over the longer term (3 years) earnings per share have decreased 8.0% annually. So it would be surprising to see a high P/E.
Remember: P/E Ratios Don’t Consider The Balance Sheet
The ‘Price’ in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. 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).
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.
UGI’s Balance Sheet
UGI’s net debt is considerable, at 114% of its market cap. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you’re comparing it to other stocks.
The Bottom Line On UGI’s P/E Ratio
UGI has a P/E of 12.4. That’s around the same as the average in the US market, which is 12.7. With significant debt and no EPS growth last year, the P/E suggests shareholders are expecting higher profit in the future. What can be absolutely certain is that the market has become significantly less optimistic about UGI over the last month, with the P/E ratio falling from 19.3 back then to 12.4 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 have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
But note: UGI 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).
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.
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.