What You Can Learn From Generac Holdings Inc.'s (NYSE:GNRC) P/E

Simply Wall St ·  Apr 16 09:43

Generac Holdings Inc.'s (NYSE:GNRC) price-to-earnings (or "P/E") ratio of 38.1x might make it look like a strong sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 16x and even P/E's below 9x are quite common.  Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.  

Generac Holdings has been struggling lately as its earnings have declined faster than most other companies.   One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market.  You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.    

NYSE:GNRC Price to Earnings Ratio vs Industry April 16th 2024

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Generac Holdings.

What Are Growth Metrics Telling Us About The High P/E?  

There's an inherent assumption that a company should far outperform the market for P/E ratios like Generac Holdings' to be considered reasonable.  

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 40%.   The last three years don't look nice either as the company has shrunk EPS by 40% in aggregate.  Therefore, it's fair to say the earnings growth recently has been undesirable for the company.  

Looking ahead now, EPS is anticipated to climb by 37% each year during the coming three years according to the analysts following the company.  With the market only predicted to deliver 10% per year, the company is positioned for a stronger earnings result.

With this information, we can see why Generac Holdings is trading at such a high P/E compared to the market.  It seems most investors are expecting this strong future growth and are willing to pay more for the stock.  

What We Can Learn From Generac Holdings' 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.

As we suspected, our examination of Generac Holdings' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E.  At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio.  Unless these conditions change, they will continue to provide strong support to the share price.    

We don't want to rain on the parade too much, but we did also find 2 warning signs for Generac Holdings that you need to be mindful of.  

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.

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