What Is Lowe's Companies's (NYSE:LOW) P/E Ratio After Its Share Price Rocketed? - Yahoo Finance

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Lowe's Companies (NYSE:LOW) shareholders are no doubt pleased to see that the share price has bounced 31% in the last month alone, although it is still down 12% over the last quarter. While recent buyers might be laughing, long term holders might not be so pleased, since the recent gain only brings the full year return to evens.

Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. 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 some would prefer to hold off buying when there is a lot of optimism towards a stock. 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.

Check out our latest analysis for Lowe's Companies

How Does Lowe's Companies's P/E Ratio Compare To Its Peers?

Lowe's Companies's P/E of 19.54 indicates some degree of optimism towards the stock. You can see in the image below that the average P/E (10.0) for companies in the specialty retail industry is lower than Lowe's Companies's P/E.

NYSE:LOW Price Estimation Relative to Market May 5th 2020

Its relatively high P/E ratio indicates that Lowe's Companies shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.

In the last year, Lowe's Companies grew EPS like Taylor Swift grew her fan base back in 2010; the 92% gain was both fast and well deserved. The sweetener is that the annual five year growth rate of 15% is also impressive. With that kind of growth rate we would generally expect a high P/E ratio.

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

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.

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.

So What Does Lowe's Companies's Balance Sheet Tell Us?

Lowe's Companies has net debt worth 22% of its market capitalization. It would probably deserve a higher P/E ratio if it was net cash, since it would have more options for growth.

The Verdict On Lowe's Companies's P/E Ratio

Lowe's Companies has a P/E of 19.5. That's higher than the average in its market, which is 14.3. The company is not overly constrained by its modest debt levels, and its recent EPS growth is nothing short of stand-out. So on this analysis a high P/E ratio seems reasonable. What we know for sure is that investors have become more excited about Lowe's Companies recently, since they have pushed its P/E ratio from 15.0 to 19.5 over the last month. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.

Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

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 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.

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What Is Lowe's Companies's (NYSE:LOW) P/E Ratio After Its Share Price Rocketed? - Yahoo Finance
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