When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 17x, you may consider Boise Cascade Company (NYSE:BCC) as an attractive investment with its 12.3x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
With earnings that are retreating more than the market's of late, Boise Cascade has been very sluggish. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. You'd much rather the company wasn't bleeding earnings if you still believe in the business. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.
How Is Boise Cascade's Growth Trending?
There's an inherent assumption that a company should underperform the market for P/E ratios like Boise Cascade's to be considered reasonable.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 44%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 174% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.
Looking ahead now, EPS is anticipated to slump, contracting by 0.3% per annum during the coming three years according to the six analysts following the company. With the market predicted to deliver 10% growth per year, that's a disappointing outcome.
With this information, we are not surprised that Boise Cascade is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.
What We Can Learn From Boise Cascade's P/E?
Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
We've established that Boise Cascade maintains its low P/E on the weakness of its forecast for sliding earnings, 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.
And what about other risks? Every company has them, and we've spotted 4 warning signs for Boise Cascade (of which 1 doesn't sit too well with us!) you should know about.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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.