When close to half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") above 15x, you may consider Travis Perkins plc (LON:TPK) as an attractive investment with its 7.9x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Recent times have been advantageous for Travis Perkins as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Travis Perkins.
Does Growth Match The Low P/E?
In order to justify its P/E ratio, Travis Perkins would need to produce sluggish growth that's trailing the market.
Retrospectively, the last year delivered an exceptional 75% gain to the company's bottom line. The latest three year period has also seen an excellent 287% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 1.7% per annum over the next three years. That's shaping up to be materially lower than the 11% per year growth forecast for the broader market.
In light of this, it's understandable that Travis Perkins' 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 Bottom Line On Travis Perkins' 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.
We've established that Travis Perkins maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.
You always need to take note of risks, for example - Travis Perkins has 1 warning sign we think you should be aware of.
If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.
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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.
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