When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 19x, you may consider TopBuild Corp. (NYSE:BLD) as an attractive investment with its 14.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
TopBuild's earnings growth of late has been pretty similar to most other companies. One possibility is that the P/E is low because investors think this modest earnings performance may begin to slide. If you like the company, you'd be hoping this isn't the case so that you could pick up some stock while it's out of favour.
Is There Any Growth For TopBuild?
The only time you'd be truly comfortable seeing a P/E as low as TopBuild's is when the company's growth is on track to lag the market.
Retrospectively, the last year delivered a decent 2.8% gain to the company's bottom line. The latest three year period has also seen an excellent 119% overall rise in EPS, aided somewhat by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Shifting to the future, estimates from the eleven analysts covering the company suggest earnings should grow by 11% over the next year. That's shaping up to be materially lower than the 15% growth forecast for the broader market.
With this information, we can see why TopBuild is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.
What We Can Learn From TopBuild's P/E?
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.
We've established that TopBuild maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.
Before you take the next step, you should know about the 1 warning sign for TopBuild that we have uncovered.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).
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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.
