Yahoo Finance How Does Sirius XM Holdings's (NASDAQ:SIRI) P/E Compare To Its Industry, After The Share Price Drop?
Unfortunately for some shareholders, the Sirius XM Holdings (NASDAQ:SIRI) share price has dived 34% in the last thirty days. The recent drop has obliterated the annual return, with the share price now down 21% 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. 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 Sirius XM Holdings
How Does Sirius XM Holdings's P/E Ratio Compare To Its Peers?
Sirius XM Holdings's P/E of 23.39 indicates some degree of optimism towards the stock. As you can see below, Sirius XM Holdings has a higher P/E than the average company (9.1) in the media industry.
Its relatively high P/E ratio indicates that Sirius XM Holdings shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Sirius XM Holdings saw earnings per share decrease by 23% last year. But over the longer term (5 years) earnings per share have increased by 19%.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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).
Sirius XM Holdings's Balance Sheet
Sirius XM Holdings has net debt equal to 37% of its market cap. You'd want to be aware of this fact, but it doesn't bother us.
The Verdict On Sirius XM Holdings's P/E Ratio
Sirius XM Holdings has a P/E of 23.4. That's higher than the average in its market, which is 11.8. With modest debt but no EPS growth in the last year, it's fair to say the P/E implies some optimism about future earnings, from the market. Given Sirius XM Holdings's P/E ratio has declined from 35.7 to 23.4 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.
Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. 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 Sirius XM Holdings. 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.
