The Return of the P/E Ratio
- Blog Post by: Lee Schafer
- April 5, 2013 - 4:14 PM
Oak Ridge Financial’s Ben Crabtree is celebrating the increasing relevance of the price/earnings ratio in the market for bank stocks.
Crabtree is a longtime analyst in financial stocks who writes regularly on community banking trends. While there may not seem to be much new to say about a P/E ratio in investing circles, it’s significant that the market is finally moving away from valuing bank stocks on book value.
Book value is more or less what a business might be worth in a liquidation. That was clearly the way to value a banking company in the depths of the financial crisis and in the period since then, when banks were digging out of problem loans and shoring up their capital.
But it’s heartening for bankers that investors are increasingly looking at earnings and earnings growth to value bank stocks. Not only do overall prices rise when that happens, it suggests that well-managed companies with good earnings potential can separate from the pack.
Crabtree reached his conclusion looking closely at the data for 31 publicly traded regional banks. He saw clear evidence that investors were focused on price earnings ratios, and “to us, this means investing in bank stocks is in the process of normalizing.”
Crabtree’s work for Oak Ridge is meant for the owners and managers of community banks, of course, not folks likely to open trading some day at the New York Stock Exchange. But bankers at smaller, privately held banks have reason to be encouraged as well.
“Just as with stock market valuations, we believe that price/book measures are of secondary importance in arriving at an appropriate value for a possible bank acquisition,” he wrote, a subject that community bankers should indeed find of interest.
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