There Is A Reason Stewart Information Services Corporation's (NYSE:STC) Price Is Undemanding
With a price-to-earnings (or "P/E") ratio of 9.5x Stewart Information Services Corporation (NYSE:STC) 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 18x and even P/E's higher than 35x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Recent times have been pleasing for Stewart Information Services as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, 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.
Check out our latest analysis for Stewart Information Services
Want the full picture on analyst estimates for the company? Then our free report on Stewart Information Services will help you uncover what's on the horizon.
What Are Growth Metrics Telling Us About The Low P/E?
In order to justify its P/E ratio, Stewart Information Services would need to produce sluggish growth that's trailing the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 151% last year. The strong recent performance means it was also able to grow EPS by 59% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.
Looking ahead now, EPS is anticipated to slump, contracting by 3.2% per year during the coming three years according to the two analysts following the company. Meanwhile, the broader market is forecast to expand by 11% each year, which paints a poor picture.
With this information, we are not surprised that Stewart Information Services 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.
What We Can Learn From Stewart Information Services' P/E?
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.
We've established that Stewart Information Services maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Stewart Information Services (at least 1 which is potentially serious), and understanding these should be part of your investment process.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a P/E below 20x.
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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