Sally Beauty Holdings, Inc. (NYSE:SBH) shares have had a really impressive month, gaining 27% after a shaky period beforehand. Taking a wider view, although not as strong as the last month, the full year gain of 25% is also fairly reasonable.
Even after such a large jump in price, Sally Beauty Holdings may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 9.1x, since almost half of all companies in the United States have P/E ratios greater than 19x and even P/E's higher than 34x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.
Sally Beauty Holdings has been struggling lately as its earnings have declined faster than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. You'd much rather the company wasn't bleeding earnings if you still believe in the business. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.
Does Growth Match The Low P/E?
There's an inherent assumption that a company should far underperform the market for P/E ratios like Sally Beauty Holdings' to be considered reasonable.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 7.6%. The last three years don't look nice either as the company has shrunk EPS by 33% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Turning to the outlook, the next year should generate growth of 22% as estimated by the six analysts watching the company. With the market only predicted to deliver 15%, the company is positioned for a stronger earnings result.
With this information, we find it odd that Sally Beauty Holdings is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can achieve future growth expectations.
What We Can Learn From Sally Beauty Holdings' P/E?
Even after such a strong price move, Sally Beauty Holdings' P/E still trails the rest of the market significantly. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
Our examination of Sally Beauty Holdings' analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.
There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Sally Beauty Holdings that you should be aware of.
You might be able to find a better investment than Sally Beauty Holdings. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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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.
