A Rising Share Price Has Us Looking Closely At Sportsman's Warehouse Holdings, Inc.'s (NASDAQ:SPWH) P/E Ratio
It's great to see Sportsman's Warehouse Holdings (NASDAQ:SPWH) shareholders have their patience rewarded with a 37% share price pop in the last month. But shareholders may not all be feeling jubilant, since the share price is still down 14% in the last year.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). So some would prefer to hold off buying when there is a lot of optimism towards a stock. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
See our latest analysis for Sportsman's Warehouse Holdings
How Does Sportsman's Warehouse Holdings's P/E Ratio Compare To Its Peers?
Sportsman's Warehouse Holdings's P/E of 9.41 indicates relatively low sentiment towards the stock. The image below shows that Sportsman's Warehouse Holdings has a lower P/E than the average (15.2) P/E for companies in the specialty retail industry.
Its relatively low P/E ratio indicates that Sportsman's Warehouse Holdings shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.
Notably, Sportsman's Warehouse Holdings grew EPS by a whopping 39% in the last year. And it has bolstered its earnings per share by 11% per year over the last five years. With that performance, I would expect it to have an above average P/E ratio. In contrast, EPS has decreased by 8.6%, annually, over 3 years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
Is Debt Impacting Sportsman's Warehouse Holdings's P/E?
Net debt totals 77% of Sportsman's Warehouse Holdings's market cap. This is enough debt that you'd have to make some adjustments before using the P/E ratio to compare it to a company with net cash.
The Bottom Line On Sportsman's Warehouse Holdings's P/E Ratio
Sportsman's Warehouse Holdings trades on a P/E ratio of 9.4, which is below the US market average of 18.0. While the EPS growth last year was strong, the significant debt levels reduce the number of options available to management. If it continues to grow, then the current low P/E may prove to be unjustified. What we know for sure is that investors are becoming less uncomfortable about Sportsman's Warehouse Holdings's prospects, since they have pushed its P/E ratio from 6.9 to 9.4 over the last month. If you like to buy stocks that could be turnaround opportunities, then this one might be a candidate; but if you're more sensitive to price, then you may feel the opportunity has passed.
Investors have an opportunity when market expectations about a stock are wrong. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
Of course you might be able to find a better stock than Sportsman's Warehouse Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
