The Lovesac Company (NASDAQ:LOVE) Looks Just Right With A 50% Price Jump
The Lovesac Company (NASDAQ:LOVE) shareholders would be excited to see that the share price has had a great month, posting a 50% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 52% in the last year.
Since its price has surged higher, Lovesac may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 20.5x, since almost half of all companies in the United States have P/E ratios under 16x and even P/E's lower than 9x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.
Recent times haven't been advantageous for Lovesac as its earnings have been falling quicker than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.
View our latest analysis for Lovesac
Keen to find out how analysts think Lovesac's future stacks up against the industry? In that case, our free report is a great place to start.
How Is Lovesac's Growth Trending?
There's an inherent assumption that a company should outperform the market for P/E ratios like Lovesac's to be considered reasonable.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 37%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.
Turning to the outlook, the next three years should generate growth of 45% per year as estimated by the five analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 12% per year, which is noticeably less attractive.
With this information, we can see why Lovesac is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Key Takeaway
Lovesac shares have received a push in the right direction, but its P/E is elevated too. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
As we suspected, our examination of Lovesac's 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. It's hard to see the share price falling strongly in the near future under these circumstances.
Before you take the next step, you should know about the 2 warning signs for Lovesac that we have uncovered.
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.
