January 22, 2022


Business is the best

How Does LPL Financial Holdings’s (NASDAQ:LPLA) P/E Compare To Its Industry, After Its Big Share Price Gain?

How Does LPL Financial Holdings’s (NASDAQ:LPLA) P/E Compare To Its Industry, After Its Big Share Price Gain?

Those holding LPL Financial Holdings (NASDAQ:LPLA) shares must be pleased that the share price has rebounded 32% in the last thirty days. But unfortunately, the stock is still down by 28% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 20% in the last year.

Assuming no other changes, a sharply higher share price makes a stock less 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). So some would prefer to hold off buying when there is a lot of optimism towards a stock. 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.

See our latest analysis for LPL Financial Holdings

How Does LPL Financial Holdings’s P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 9.89 that sentiment around LPL Financial Holdings isn’t particularly high. The image below shows that LPL Financial Holdings has a lower P/E than the average (32.7) P/E for companies in the capital markets industry.

How Does LPL Financial Holdings’s (NASDAQ:LPLA) P/E Compare To Its Industry, After Its Big Share Price Gain?
NasdaqGS:LPLA Price Estimation Relative to Market May 22nd 2020

LPL Financial Holdings’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 LPL Financial Holdings, 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

P/E ratios primarily reflect market expectations around earnings growth rates. 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. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.

Most would be impressed by LPL Financial Holdings earnings growth of 19% in the last year. And earnings per share have improved by 31% annually, over the last five years. This could arguably justify a relatively high P/E ratio.

Remember: P/E Ratios Don’t Consider The Balance Sheet

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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

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.

Is Debt Impacting LPL Financial Holdings’s P/E?

Net debt is 38% of LPL Financial Holdings’s sell my house fast jacksonville market cap. While it’s worth keeping this in mind, it isn’t a worry.

The Bottom Line On LPL Financial Holdings’s P/E Ratio

LPL Financial Holdings trades on a P/E ratio of 9.9, which is below the US market average of 15.0. The company hasn’t stretched its balance sheet, and earnings growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low. What we know for sure is that investors are becoming less uncomfortable about LPL Financial Holdings’s prospects, since they have pushed its P/E ratio from 7.5 to 9.9 over the last month. 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 it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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 LPL Financial Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.

Love or hate this article? Concerned about the content? Get in touch with us directly. Alternatively, email [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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.