It's not a stretch to say that Lamb Weston Holdings, Inc.'s (NYSE:LW) price-to-earnings (or "P/E") ratio of 17.9x right now seems quite "middle-of-the-road" compared to the market in the United States, where the median P/E ratio is around 18x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.
Recent times haven't been advantageous for Lamb Weston Holdings as its earnings have been falling quicker than most other companies. It might be that many expect the dismal earnings performance to revert back to market averages soon, which has kept the P/E from falling. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. If not, then existing shareholders may be a little nervous about the viability of the share price.
What Are Growth Metrics Telling Us About The P/E?
The only time you'd be comfortable seeing a P/E like Lamb Weston Holdings' is when the company's growth is tracking the market closely.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 39%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 146% 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.
Looking ahead now, EPS is anticipated to climb by 9.7% each year during the coming three years according to the ten analysts following the company. With the market predicted to deliver 11% growth each year, the company is positioned for a comparable earnings result.
In light of this, it's understandable that Lamb Weston Holdings' P/E sits in line with the majority of other companies. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.
The Final Word
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
As we suspected, our examination of Lamb Weston Holdings' analyst forecasts revealed that its market-matching earnings outlook is contributing to its current P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings won't throw up any surprises. Unless these conditions change, they will continue to support the share price at these levels.
It is also worth noting that we have found 4 warning signs for Lamb Weston Holdings (1 can't be ignored!) that you need to take into consideration.
You might be able to find a better investment than Lamb Weston 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.
