Celtic plc (LON:CCP) Looks Inexpensive But Perhaps Not Attractive Enough
Celtic plc's (LON:CCP) price-to-earnings (or "P/E") ratio of 3.4x might make it look like a strong buy right now compared to the market in the United Kingdom, where around half of the companies have P/E ratios above 16x and even P/E's above 28x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.
Celtic certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If you 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 Celtic
Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Celtic will help you shine a light on its historical performance.
How Is Celtic's Growth Trending?
The only time you'd be truly comfortable seeing a P/E as depressed as Celtic's is when the company's growth is on track to lag the market decidedly.
Retrospectively, the last year delivered an exceptional 469% gain to the company's bottom line. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 13% shows it's noticeably less attractive on an annualised basis.
In light of this, it's understandable that Celtic's P/E sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.
What We Can Learn From Celtic's 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 Celtic maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.
You should always think about risks. Case in point, we've spotted 2 warning signs for Celtic you should be aware of, and 1 of them makes us a bit uncomfortable.
If you're unsure about the strength of Celtic's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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.
