【foxey new york】How Does Prosperity Bancshares's (NYSE:PB) P/E Compare To Its Industry, After The Share Price Drop?

Unfortunately for some shareholders,foxey new york the

Prosperity Bancshares

(

NYSE:PB

) share price has dived 32% in the last thirty days. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 33% 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). The implication here is that long term investors have an opportunity when expectations of a company are too low. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

Check out our latest analysis for Prosperity Bancshares

How Does Prosperity Bancshares's P/E Ratio Compare To Its Peers?

Prosperity Bancshares has a P/E ratio of 10.82. You can see in the image below that the average P/E (10.5) for companies in the banks industry is roughly the same as Prosperity Bancshares's P/E.

NYSE:PB Price Estimation Relative to Market, March 10th 2020

Prosperity Bancshares's P/E tells us that market participants think its prospects are roughly in line with its industry. So if Prosperity Bancshares actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such as

insider buying and selling

, could help you form your own view on whether that is likely.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Prosperity Bancshares shrunk earnings per share by 1.9% last year. But it has grown its earnings per share by 4.7% per year over the last three years.

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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

Story continues

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

Prosperity Bancshares's net debt equates to 31% of its market capitalization. You'd want to be aware of this fact, but it doesn't bother us.

The Verdict On Prosperity Bancshares's P/E Ratio

Prosperity Bancshares has a P/E of 10.8. That's below the average in the US market, which is 15.1. With only modest debt, it's likely the lack of EPS growth at least partially explains the pessimism implied by the P/E ratio. Given Prosperity Bancshares's P/E ratio has declined from 16.0 to 10.8 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 prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.

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

report on the analyst consensus forecasts

could help you make a

master move

on this stock.

Of course,

you might find a fantastic investment by looking at a few good candidates.

So take a peek at this

free

list of companies with modest (or no) debt, trading on a P/E below 20.

If you spot an error that warrants correction, please contact the editor at

[email protected]

. 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.

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