When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 17x, you may consider Hub Group, Inc. (NASDAQ:HUBG) as a stock to potentially avoid with its 20.5x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
With earnings that are retreating more than the market's of late, Hub Group has been very sluggish. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
How Is Hub Group's Growth Trending?
In order to justify its P/E ratio, Hub Group would need to produce impressive growth in excess of the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 58%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 83% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.
Turning to the outlook, the next three years should generate growth of 16% per annum as estimated by the twelve analysts watching the company. With the market only predicted to deliver 9.9% per year, the company is positioned for a stronger earnings result.
In light of this, it's understandable that Hub Group's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Bottom Line On Hub Group's P/E
We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
As we suspected, our examination of Hub Group's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.
It is also worth noting that we have found 1 warning sign for Hub Group that you need to take into consideration.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.