What Is Sportsman's Warehouse Holdings's (NASDAQ:SPWH) P/E Ratio After Its Share Price Rocketed?
It's great to see Sportsman's Warehouse Holdings (NASDAQ:SPWH) shareholders have their patience rewarded with a 39% share price pop in the last month. Zooming out, the annual gain of 135% knocks our socks off.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. The implication here is that deep value investors might steer clear when expectations of a company are too high. 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.
View our latest analysis for Sportsman's Warehouse Holdings
Does Sportsman's Warehouse Holdings Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 19.90 that there is some investor optimism about Sportsman's Warehouse Holdings. The image below shows that Sportsman's Warehouse Holdings has a higher P/E than the average (10.8) P/E for companies in the specialty retail industry.
Sportsman's Warehouse Holdings's P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. 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.
Sportsman's Warehouse Holdings's earnings per share fell by 15% in the last twelve months. But EPS is up 6.3% over the last 5 years. And over the longer term (3 years) earnings per share have decreased 13% annually. This might lead to low expectations.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. In other words, it does not consider any debt or cash that the company may have on the balance sheet. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
So What Does Sportsman's Warehouse Holdings's Balance Sheet Tell Us?
Sportsman's Warehouse Holdings's net debt equates to 40% of its market capitalization. While that's enough to warrant consideration, it doesn't really concern us.
The Bottom Line On Sportsman's Warehouse Holdings's P/E Ratio
Sportsman's Warehouse Holdings's P/E is 19.9 which is above average (14.8) in its market. With a bit of debt, but a lack of recent growth, it's safe to say the market is expecting improved profit performance from the company, in the next few years. What is very clear is that the market has become significantly more optimistic about Sportsman's Warehouse Holdings over the last month, with the P/E ratio rising from 14.3 back then to 19.9 today. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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 report on the analyst consensus forecasts could help you make a master move on this stock.
You might be able to find a better buy than Sportsman's Warehouse Holdings. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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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. Thank you for reading.
