How Does Nu Skin Enterprises's (NYSE:NUS) P/E Compare To Its Industry, After Its Big Share Price Gain?
Nu Skin Enterprises (NYSE:NUS) shareholders are no doubt pleased to see that the share price has bounced 32% in the last month alone, although it is still down 24% over the last quarter. But that will do little to salve the savage burn caused by the 50% share price decline, over the last year.
All else being equal, a sharp share price increase should make a stock less 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 deep value investors might steer clear when expectations of a company are too high. 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.
Check out our latest analysis for Nu Skin Enterprises
Does Nu Skin Enterprises Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 8.75 that sentiment around Nu Skin Enterprises isn't particularly high. We can see in the image below that the average P/E (12.4) for companies in the personal products industry is higher than Nu Skin Enterprises's P/E.
Nu Skin Enterprises's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Nu Skin Enterprises, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Notably, Nu Skin Enterprises grew EPS by a whopping 41% in the last year. And it has improved its earnings per share by 6.6% per year over the last three years. I'd therefore be a little surprised if its P/E ratio was not relatively high.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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 Nu Skin Enterprises's Debt Impact Its P/E Ratio?
Net debt totals just 1.2% of Nu Skin Enterprises's market cap. So it doesn't have as many options as it would with net cash, but its debt would not have much of an impact on its P/E ratio.
The Bottom Line On Nu Skin Enterprises's P/E Ratio
Nu Skin Enterprises trades on a P/E ratio of 8.7, which is below the US market average of 14.4. The EPS growth last year was strong, and debt levels are quite reasonable. If it continues to grow, then the current low P/E may prove to be unjustified. What is very clear is that the market has become less pessimistic about Nu Skin Enterprises over the last month, with the P/E ratio rising from 6.7 back then to 8.7 today. If you like to buy stocks that could be turnaround opportunities, then this one might be a candidate; but if you're more sensitive to price, then you may feel the opportunity has passed.
Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
You might be able to find a better buy than Nu Skin Enterprises. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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.
