To the annoyance of some shareholders,luna's secret pregnant with alpha's son

Malibu Boats

(

NASDAQ:MBUU

) shares are down a considerable 31% in the last month. Even longer term holders have taken a real hit with the stock declining 26% in the last year.

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. So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. 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.

View our latest analysis for Malibu Boats

How Does Malibu Boats's P/E Ratio Compare To Its Peers?

Malibu Boats's P/E of 9.36 indicates relatively low sentiment towards the stock. The image below shows that Malibu Boats has a lower P/E than the average (15.1) P/E for companies in the leisure industry.

NasdaqGM:MBUU Price Estimation Relative to Market, March 10th 2020

Malibu Boats'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 Malibu Boats, it's quite possible it could surprise on the upside. You should delve deeper. I like to check

if company insiders have been buying or selling

.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the 'E' will be higher. 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.

Notably, Malibu Boats grew EPS by a whopping 35% in the last year. And its annual EPS growth rate over 3 years is 46%. So we'd generally expect it to have a relatively high P/E ratio.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

Malibu Boats's Balance Sheet

Malibu Boats has net debt worth just 8.3% of its market capitalization. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.

Story continues

The Bottom Line On Malibu Boats's P/E Ratio

Malibu Boats's P/E is 9.4 which is below average (15.1) in the US market. The company does have a little debt, and EPS growth was good last year. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue. Given analysts are expecting further growth, one might have expected a higher P/E ratio.

That may be worth further research

. What can be absolutely certain is that the market has become more pessimistic about Malibu Boats over the last month, with the P/E ratio falling from 13.5 back then to 9.4 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for deep value investors this stock might justify some research.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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.

Of course

you might be able to find a better stock than Malibu Boats

. 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

[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.

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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