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Pact Group Holdings Ltd (ASX:PGH) Shares Fly 27% But Investors Aren't Buying For Growth

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Simply Wall St
·3 min read
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Pact Group Holdings Ltd (ASX:PGH) shareholders have had their patience rewarded with a 27% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 40% in the last year.

In spite of the firm bounce in price, Pact Group Holdings may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 10.7x, since almost half of all companies in Australia have P/E ratios greater than 23x and even P/E's higher than 42x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Pact Group Holdings certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Pact Group Holdings

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Keen to find out how analysts think Pact Group Holdings' future stacks up against the industry? In that case, our free report is a great place to start.

How Is Pact Group Holdings' Growth Trending?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Pact Group Holdings' to be considered reasonable.

Retrospectively, the last year delivered an exceptional 60% gain to the company's bottom line. The latest three year period has also seen a 8.5% overall rise in EPS, aided extensively by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Shifting to the future, estimates from the six analysts covering the company suggest earnings growth is heading into negative territory, declining 11% each year over the next three years. With the market predicted to deliver 22% growth per year, that's a disappointing outcome.

With this information, we are not surprised that Pact Group Holdings is trading at a P/E lower than the market. 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.

The Key Takeaway

Even after such a strong price move, Pact Group Holdings' P/E still trails the rest of the market significantly. 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 Pact Group Holdings' analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you take the next step, you should know about the 4 warning signs for Pact Group Holdings (1 makes us a bit uncomfortable!) that we have uncovered.

You might be able to find a better investment than Pact Group Holdings. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.