Want to participate in a short research study? Help shape the future of investing tools and earn a $40 gift card!
With a price-to-earnings (or "P/E") ratio of 8.6x Hyatt Hotels Corporation (NYSE:H) may be sending bullish signals at the moment, given that almost half of all companies in the United States have P/E ratios greater than 17x and even P/E's higher than 33x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.
Hyatt Hotels certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
Does Hyatt Hotels Have A Relatively High Or Low P/E For Its Industry?
It's plausible that Hyatt Hotels' low P/E ratio could be a result of tendencies within its own industry. The image below shows that the Hospitality industry as a whole has a P/E ratio higher than the market. So we'd say there is practically no merit in the premise that the company's ratio being shaped by its industry at this time. Some industry P/E's don't move around a lot and right now most companies within the Hospitality industry should be getting a boost. Still, the strength of the company's earnings will most likely determine where its P/E shall sit.
Want the full picture on analyst estimates for the company? Then our free report on Hyatt Hotels will help you uncover what's on the horizon.
Does Growth Match The Low P/E?
There's an inherent assumption that a company should underperform the market for P/E ratios like Hyatt Hotels' to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 52% last year. The strong recent performance means it was also able to grow EPS by 239% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 56% per annum as estimated by the analysts watching the company. With the market predicted to deliver 9.2% growth per year, that's a disappointing outcome.
In light of this, it's understandable that Hyatt Hotels' 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 Hyatt Hotels' 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 Hyatt Hotels maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
It is also worth noting that we have found 4 warning signs for Hyatt Hotels (1 makes us a bit uncomfortable!) that you need to take into consideration.
Of course, you might also be able to find a better stock than Hyatt Hotels. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email email@example.com.