Central Valley Community Bancorp (NASDAQ:CVCY) shareholders are no doubt pleased to see that the share price has bounced 32% in the last month alone, although it is still down 28% over the last quarter. But shareholders may not all be feeling jubilant, since the share price is still down 28% in the last year.
Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. The implication here is that deep value investors might steer clear when expectations of a company are too high. 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). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.
How Does Central Valley Community Bancorp’s P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 8.18 that sentiment around Central Valley Community Bancorp isn’t particularly high. If you look at the image below, you can see Central Valley Community Bancorp has a lower P/E than the average (9.8) in the banks industry classification.
This suggests that market participants think Central Valley Community Bancorp 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. 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
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. 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.
Central Valley Community Bancorp increased earnings per share by an impressive 12% over the last twelve months. And its annual EPS growth rate over 5 years is 30%. So one might expect an above average P/E ratio.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn’t take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
Central Valley Community Bancorp’s Balance Sheet
Central Valley Community Bancorp has net cash of US$41m. This is fairly high at 23% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.
The Bottom Line On Central Valley Community Bancorp’s P/E Ratio
Central Valley Community Bancorp has a P/E of 8.2. That’s below the average in the US market, which is 14.3. The net cash position gives plenty of options to the business, and the recent improvement in EPS is good to see. The below average P/E ratio suggests that market participants don’t believe the strong growth will continue. What is very clear is that the market has become less pessimistic about Central Valley Community Bancorp over the last month, with the P/E ratio rising from 6.2 back then to 8.2 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 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 report on the analyst consensus forecasts could help you make a master move on this stock.
But note: Central Valley Community Bancorp may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
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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