Ambac Financial Group, Inc. (NYSE:AMBC) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.
In spite of the firm bounce in price, given about half the companies in the United States have price-to-earnings ratios (or "P/E's") above 16x, you may still consider Ambac Financial Group as a highly attractive investment with its 3.4x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
While the market has experienced earnings growth lately, Ambac Financial Group's earnings have gone into reverse gear, which is not great. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
Check out our latest analysis for Ambac Financial Group
What Are Growth Metrics Telling Us About The Low P/E?
In order to justify its P/E ratio, Ambac Financial Group would need to produce anemic growth that's substantially trailing the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 39%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.
Looking ahead now, EPS is anticipated to slump, contracting by 94% during the coming year according to the sole analyst following the company. That's not great when the rest of the market is expected to grow by 10.0%.
In light of this, it's understandable that Ambac Financial Group's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.
What We Can Learn From Ambac Financial Group's P/E?
Even after such a strong price move, Ambac Financial Group's 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.
As we suspected, our examination of Ambac Financial Group's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. 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.
Plus, you should also learn about these 4 warning signs we've spotted with Ambac Financial Group (including 2 which can't be ignored).
If you're unsure about the strength of Ambac Financial Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.