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Mar 18

How Does Heartland Group Holdings’s (NZSE:HGH) P/E Compare To Its Industry, After The Share Price Drop? – Yahoo Finance

To the annoyance of some shareholders, Heartland Group Holdings (NZSE:HGH) shares are down a considerable 34% in the last month. The recent drop has obliterated the annual return, with the share price now down 20% over that longer period.

Assuming nothing else has changed, a lower share price makes a stock more 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). The implication here is that long term investors have an opportunity when expectations of a company are too low. 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

Check out our latest analysis for Heartland Group Holdings

Heartland Group Holdings's P/E of 10.01 indicates some degree of optimism towards the stock. You can see in the image below that the average P/E (8.5) for companies in the banks industry is lower than Heartland Group Holdings's P/E.

NZSE:HGH Price Estimation Relative to Market, March 16th 2020

Heartland Group Holdings's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.

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.

Notably, Heartland Group Holdings grew EPS by a whopping 27% in the last year. And it has bolstered its earnings per share by 4.6% per year over the last five years. With that performance, I would expect it to have an above average P/E ratio.

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. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.

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.

Net debt totals a substantial 133% of Heartland Group Holdings's 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.

Heartland Group Holdings trades on a P/E ratio of 10.0, which is below the NZ market average of 17.0. The company has a meaningful amount of debt on the balance sheet, but that should not eclipse the solid earnings growth. If it continues to grow, then the current low P/E may prove to be unjustified. Given Heartland Group Holdings's P/E ratio has declined from 15.2 to 10.0 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.

Story continues

Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

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.

More:
How Does Heartland Group Holdings's (NZSE:HGH) P/E Compare To Its Industry, After The Share Price Drop? - Yahoo Finance

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