When close to half the companies in the United Kingdom have price-to-earnings ratios (or “P/E’s”) above 18x, you may consider Bellway p.l.c. (LON:BWY) as a highly attractive investment with its 5.8x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it’s justified.
With only a limited decrease in earnings compared to most other companies of late, Bellway has been doing relatively well. One possibility is that the P/E is low because investors think this relatively better earnings performance might be about to deteriorate significantly. If you still like the company, you’d want its earnings trajectory to turn around before making any decisions. But at the very least, you’d be hoping that earnings don’t fall off a cliff completely if your plan is to pick up some stock while it’s out of favour.
If you’d like to see what analysts are forecasting going forward, you should check out our free report on Bellway.
Does Growth Match The Low P/E?
Bellway’s P/E ratio would be typical for a company that’s expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.
If we review the last year of earnings, dishearteningly the company’s profits fell to the tune of 3.3%. Regardless, EPS has managed to lift by a handy 23% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to slump, contracting by 9.4% each year during the coming three years according to the analysts following the company. Meanwhile, the broader market is forecast to expand by 15% per annum, which paints a poor picture.
In light of this, it’s understandable that Bellway’s P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.
The Final Word
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
We’ve established that Bellway maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won’t provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
A lot of potential risks can sit within a company’s balance sheet. Take a look at our free balance sheet analysis for Bellway with six simple checks on some of these key factors.
You might be able to find a better investment than Bellway. 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.