How Does Marriott Vacations Worldwide's (NYSE:VAC) P/E Compare To Its Industry, After The Share Price Drop?

Unfortunately for some shareholders, the Marriott Vacations Worldwide (NYSE:VAC) share price has dived 34% in the last thirty days. The recent drop has obliterated the annual return, with the share price now down 14% over that longer period.

All else being equal, a share price drop should make a stock more attractive to potential investors. 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). The implication here is that long term investors have an opportunity when expectations of a company are too low. 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 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 Marriott Vacations Worldwide

Does Marriott Vacations Worldwide Have A Relatively High Or Low P/E For Its Industry?

Marriott Vacations Worldwide's P/E of 25.55 indicates some degree of optimism towards the stock. You can see in the image below that the average P/E (15.6) for companies in the hospitality industry is lower than Marriott Vacations Worldwide's P/E.

That means that the market expects Marriott Vacations Worldwide will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

When earnings fall, the 'E' decreases, over time. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Marriott Vacations Worldwide's earnings made like a rocket, taking off 90% last year. Regrettably, the longer term performance is poor, with EPS down -5.6% per year over 3 years.

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. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

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).

Is Debt Impacting Marriott Vacations Worldwide's P/E?

Marriott Vacations Worldwide has net debt worth a very significant 114% of its market capitalization. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you're comparing it to other stocks.

The Bottom Line On Marriott Vacations Worldwide's P/E Ratio

Marriott Vacations Worldwide trades on a P/E ratio of 25.6, which is above its market average of 14.7. While its debt levels are rather high, at least its EPS is growing quickly. So despite the debt it is, perhaps, not unreasonable to see a high P/E ratio. Given Marriott Vacations Worldwide's P/E ratio has declined from 39.0 to 25.6 in the last month, we know for sure that the market is significantly less confident about the business today, than it was back then. For those who don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.

Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

You might be able to find a better buy than Marriott Vacations Worldwide. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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.