Consensus Cloud Solutions, Inc. (NASDAQ:CCSI) shares have had a really impressive month, gaining 26% after a shaky period beforehand. Taking a wider view, although not as strong as the last month, the full year gain of 19% is also fairly reasonable.
Even after such a large jump in price, Consensus Cloud Solutions may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 5.6x, since almost half of all companies in the United States have P/E ratios greater than 20x and even P/E's higher than 36x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
With earnings growth that's superior to most other companies of late, Consensus Cloud Solutions has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
How Is Consensus Cloud Solutions' Growth Trending?
The only time you'd be truly comfortable seeing a P/E as depressed as Consensus Cloud Solutions' is when the company's growth is on track to lag the market decidedly.
Retrospectively, the last year delivered an exceptional 17% gain to the company's bottom line. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 16% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Turning to the outlook, the next year should generate growth of 6.5% as estimated by the five analysts watching the company. That's shaping up to be materially lower than the 15% growth forecast for the broader market.
In light of this, it's understandable that Consensus Cloud Solutions' P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.
The Final Word
Consensus Cloud Solutions' recent share price jump still sees its P/E sitting firmly flat on the ground. 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 Consensus Cloud Solutions' analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
It is also worth noting that we have found 2 warning signs for Consensus Cloud Solutions that you need to take into consideration.
You might be able to find a better investment than Consensus Cloud Solutions. 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.
