Yahoo Finance A Rising Share Price Has Us Looking Closely At Southwestern Energy Company's (NYSE:SWN) P/E Ratio
Southwestern Energy (NYSE:SWN) shareholders are no doubt pleased to see that the share price has bounced 36% in the last month alone, although it is still down 12% over the last quarter. But that will do little to salve the savage burn caused by the 54% share price decline, over the last year.
All else being equal, a sharp share price increase should make a stock less 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 some would prefer to hold off buying when there is a lot of optimism towards a stock. 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 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 Southwestern Energy
How Does Southwestern Energy's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 1.28 that sentiment around Southwestern Energy isn't particularly high. We can see in the image below that the average P/E (6.9) for companies in the oil and gas industry is higher than Southwestern Energy's P/E.
This suggests that market participants think Southwestern Energy will underperform other companies in its industry. Since the market seems unimpressed with Southwestern Energy, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
In the last year, Southwestern Energy grew EPS like Taylor Swift grew her fan base back in 2010; the 77% gain was both fast and well deserved. Unfortunately, earnings per share are down 8.9% a year, over 5 years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
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.
Is Debt Impacting Southwestern Energy's P/E?
Southwestern Energy's net debt is considerable, at 196% 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 Verdict On Southwestern Energy's P/E Ratio
Southwestern Energy trades on a P/E ratio of 1.3, which is below the US market average of 12.8. While the EPS growth last year was strong, the significant debt levels reduce the number of options available to management. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue. What is very clear is that the market has become less pessimistic about Southwestern Energy over the last month, with the P/E ratio rising from 0.9 back then to 1.3 today. If you like to buy stocks that could be turnaround opportunities, then this one might be a candidate; but if you're more sensitive to price, then you may feel the opportunity has passed.
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.
But note: Southwestern Energy 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 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.
