A Sliding Share Price Has Us Looking At ConocoPhillips's (NYSE:COP) P/E Ratio - Yahoo Finance

To the annoyance of some shareholders, ConocoPhillips (NYSE:COP) shares are down a considerable 41% in the last month. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 48% drop over twelve months.

All else being equal, a share price drop should make a stock more attractive to potential investors. 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 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). 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 ConocoPhillips

Does ConocoPhillips Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 5.29 that sentiment around ConocoPhillips isn't particularly high. If you look at the image below, you can see ConocoPhillips has a lower P/E than the average (7.5) in the oil and gas industry classification.

NYSE:COP Price Estimation Relative to Market, March 10th 2020

ConocoPhillips'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 ConocoPhillips, 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. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. 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.

Most would be impressed by ConocoPhillips earnings growth of 20% in the last year. And it has bolstered its earnings per share by 6.8% per year over the last five years. 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. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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 ConocoPhillips's Debt Impact Its P/E Ratio?

ConocoPhillips's net debt is 11% of its market cap. This could bring some additional risk, and reduce the number of investment options for management; worth remembering if you compare its P/E to businesses without debt.

The Bottom Line On ConocoPhillips's P/E Ratio

ConocoPhillips trades on a P/E ratio of 5.3, which is below the US market average of 15.1. The company does have a little debt, and EPS growth was good last year. If it continues to grow, then the current low P/E may prove to be unjustified. What can be absolutely certain is that the market has become more pessimistic about ConocoPhillips over the last month, with the P/E ratio falling from 9.0 back then to 5.3 today. 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.

When the market is wrong about a stock, it gives savvy investors an opportunity. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

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.

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A Sliding Share Price Has Us Looking At ConocoPhillips's (NYSE:COP) P/E Ratio - Yahoo Finance
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