When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 20x, you may consider Denny's Corporation (NASDAQ:DENN) as an attractive investment with its 12.7x 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, Denny's has been very sluggish. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.
Keen to find out how analysts think Denny's' future stacks up against the industry? In that case, our free report is a great place to start.
Is There Any Growth For Denny's?
There's an inherent assumption that a company should underperform the market for P/E ratios like Denny's' to be considered reasonable.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 19%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 77% in total over the last three years. 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.
Shifting to the future, estimates from the seven analysts covering the company suggest earnings growth is heading into negative territory, declining 11% each year over the next three years. That's not great when the rest of the market is expected to grow by 13% per annum.
In light of this, it's understandable that Denny'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 Denny'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.
As we suspected, our examination of Denny's' analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. 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.
Before you settle on your opinion, we've discovered 4 warning signs for Denny's (2 are a bit concerning!) that you should be aware of.
You might be able to find a better investment than Denny's. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).
This article by Simply Wall St is general in nature. 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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