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It's not a stretch to say that HCI Group, Inc.'s (NYSE:HCI) price-to-earnings (or "P/E") ratio of 18x right now seems quite "middle-of-the-road" compared to the market in the United States, where the median P/E ratio is around 17x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.
Recent times have been quite advantageous for HCI Group as its earnings have been rising very briskly. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. 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 not quite in favour.
Does HCI Group Have A Relatively High Or Low P/E For Its Industry?
We'd like to see if P/E's within HCI Group's industry might provide some colour around the company's fairly average P/E ratio. You'll notice in the figure below that P/E ratios in the Insurance industry are lower than the market. So it appears the company's ratio isn't really influenced by these industry numbers currently. Ordinarily, the majority of companies' P/E's would be compressed by the general conditions within the Insurance industry. Whilst this can be a heavy component, industry factors are normally secondary to company financials and earnings.
Although there are no analyst estimates available for HCI Group, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
What Are Growth Metrics Telling Us About The P/E?
The only time you'd be comfortable seeing a P/E like HCI Group's is when the company's growth is tracking the market closely.
Retrospectively, the last year delivered an exceptional 37% gain to the company's bottom line. Still, incredibly EPS has fallen 28% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
It's interesting to note that the rest of the market is similarly expected to decline by 10% over the next year, which is just as bad as the company's recent medium-term earnings decline.
With this information, it might not be too hard to see why HCI Group is trading at a fairly similar P/E in comparison. However, shrinking earnings are unlikely to lead to a stable P/E long-term, which could set up shareholders for future disappointment regardless. There is potential for the P/E to fall to lower levels if the company doesn't improve its profitability, which would be difficult to do with the current market outlook.
The Bottom Line On HCI Group's P/E
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 HCI Group maintains its moderate P/E off the back of its recent three-year earnings being in line with the wider market forecast, as expected. Right now shareholders are comfortable with the P/E as they seem confident future earnings won't throw up any further unpleasant surprises. Although, we are concerned whether the company can maintain its medium-term level of performance under these tough market conditions. In the meantime, unless the company's relative performance changes, the share price will find support at these levels.
We don't want to rain on the parade too much, but we did also find 1 warning sign for HCI Group that you need to be mindful of.
If you're unsure about the strength of HCI Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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