To the annoyance of some shareholders, Norwegian Cruise Line Holdings (NYSE:NCLH) shares are down a considerable 34% in the last month. That drop has capped off a tough year for shareholders, with the share price down 35% in that time.
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. 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 Norwegian Cruise Line Holdings’s P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 8.37 that sentiment around Norwegian Cruise Line Holdings isn’t particularly high. If you look at the image below, you can see Norwegian Cruise Line Holdings has a lower P/E than the average (21.1) in the hospitality industry classification.
This suggests that market participants think Norwegian Cruise Line Holdings will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. 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
Generally speaking the rate of earnings growth has a profound impact on a company’s P/E multiple. If earnings are growing quickly, then the ‘E’ in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Norwegian Cruise Line Holdings maintained roughly steady earnings over the last twelve months. But it has grown its earnings per share by 21% per year over the last five 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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
How Does Norwegian Cruise Line Holdings’s Debt Impact Its P/E Ratio?
Net debt totals 82% of Norwegian Cruise Line Holdings’s market cap. This is a reasonably significant level of debt — all else being equal you’d expect a much lower P/E than if it had net cash.
The Verdict On Norwegian Cruise Line Holdings’s P/E Ratio
Norwegian Cruise Line Holdings trades on a P/E ratio of 8.4, which is below the US market average of 17.1. While the recent EPS growth is a positive, the significant amount of debt on the balance sheet may be contributing to pessimistic market expectations. Given Norwegian Cruise Line Holdings’s P/E ratio has declined from 12.7 to 8.4 in the last month, we know for sure that the market is more worried about the business today, than it was back then. For those who prefer invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.
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 freevisual report on analyst forecasts could hold the key to an excellent investment decision.
If you spot an error that warrants correction, please contact the editor at [email protected]. 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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To the annoyance of some shareholders, Norwegian Cruise Line Holdings (NYSE:NCLH) shares are down a considerable 34…