Despite an already strong run, Lands' End, Inc. (NASDAQ:LE) shares have been powering on, with a gain of 34% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 26% in the last year.
Following the firm bounce in price, given close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 18x, you may consider Lands' End as a stock to avoid entirely with its 38.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
Recent times have been pleasing for Lands' End as its earnings have risen in spite of the market's earnings going into reverse. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Lands' End.
Is There Enough Growth For Lands' End?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Lands' End's to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 32% last year. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.
Looking ahead now, EPS is anticipated to slump, contracting by 17% during the coming year according to the dual analysts following the company. With the market predicted to deliver 5.4% growth , that's a disappointing outcome.
With this information, we find it concerning that Lands' End is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a very good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.
The Key Takeaway
Shares in Lands' End have built up some good momentum lately, which has really inflated its P/E. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
Our examination of Lands' End's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a poor outlook with earnings heading backwards, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.
Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Lands' End (1 shouldn't be ignored) you should be aware of.
If you're unsure about the strength of Lands' End's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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