When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 17x, you may consider Tri Pointe Homes, Inc. (NYSE:TPH) as a highly attractive investment with its 8.3x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.
Tri Pointe Homes could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. 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 Tri Pointe Homes
Does Growth Match The Low P/E?
There's an inherent assumption that a company should far underperform the market for P/E ratios like Tri Pointe Homes' to be considered reasonable.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 18%. Still, the latest three year period has seen an excellent 99% overall rise in EPS, in spite of its unsatisfying short-term performance. 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.
Turning to the outlook, the next three years should generate growth of 0.4% per annum as estimated by the seven analysts watching the company. With the market predicted to deliver 13% growth each year, the company is positioned for a weaker earnings result.
With this information, we can see why Tri Pointe Homes 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 Tri Pointe Homes' 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 Tri Pointe Homes 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.
Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Tri Pointe Homes with six simple checks on some of these key factors.
Of course, you might also be able to find a better stock than Tri Pointe Homes. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.