A Sliding Share Price Has Us Looking At Pinnacle West Capital Corporation's (NYSE:PNW) P/E Ratio
Unfortunately for some shareholders, the Pinnacle West Capital (NYSE:PNW) share price has dived 32% in the last thirty days. Even longer term holders have taken a real hit with the stock declining 28% in the last year.
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 Pinnacle West Capital
How Does Pinnacle West Capital's P/E Ratio Compare To Its Peers?
Pinnacle West Capital's P/E of 14.23 indicates relatively low sentiment towards the stock. If you look at the image below, you can see Pinnacle West Capital has a lower P/E than the average (18.3) in the electric utilities industry classification.
Its relatively low P/E ratio indicates that Pinnacle West Capital shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Pinnacle West Capital, 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
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. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Pinnacle West Capital increased earnings per share by 5.0% last year. And it has bolstered its earnings per share by 5.9% per year over the last five years.
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. 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 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.
How Does Pinnacle West Capital's Debt Impact Its P/E Ratio?
Pinnacle West Capital has net debt worth 75% of its market capitalization. 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 Pinnacle West Capital's P/E Ratio
Pinnacle West Capital's P/E is 14.2 which is above average (12.7) in its market. With significant debt and fairly modest EPS growth last year, shareholders are betting on sustained improvement. Given Pinnacle West Capital's P/E ratio has declined from 21.0 to 14.2 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.
Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. 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 be able to find a better stock than Pinnacle West Capital. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
