To the annoyance of some shareholders, Zions Bancorporation National Association (NASDAQ:ZION) shares are down a considerable 39% in the last month. That drop has capped off a tough year for shareholders, with the share price down 43% in that time.
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.
How Does Zions Bancorporation National Association's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 5.85 that sentiment around Zions Bancorporation National Association isn't particularly high. We can see in the image below that the average P/E (8.6) for companies in the banks industry is higher than Zions Bancorporation National Association's P/E.
This suggests that market participants think Zions Bancorporation National Association will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. 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. When earnings grow, the 'E' increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Zions Bancorporation National Association maintained roughly steady earnings over the last twelve months. But over the longer term (5 years) earnings per share have increased by 21%.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. 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.
Zions Bancorporation National Association's Balance Sheet
Net debt is 45% of Zions Bancorporation National Association's market cap. You'd want to be aware of this fact, but it doesn't bother us.
The Verdict On Zions Bancorporation National Association's P/E Ratio
Zions Bancorporation National Association's P/E is 5.9 which is below average (12.6) in the US market. The company does have a little debt, and EPS is moving in the right direction. If you believe growth will continue - or even increase - then the low P/E may signify opportunity. What can be absolutely certain is that the market has become more pessimistic about Zions Bancorporation National Association over the last month, with the P/E ratio falling from 9.6 back then to 5.9 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for deep value investors this stock might justify some research.
Investors should be looking to buy stocks that the market is wrong about. 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 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.
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