Nasdaq
華爾街日報There's Reason For Concern Over Information Services Corporation's (TSE:ISC) Massive 27% Price Jump
The Information Services Corporation (TSE:ISC) share price has done very well over the last month, posting an excellent gain of 27%. Looking back a bit further, it's encouraging to see the stock is up 80% in the last year.
Following the firm bounce in price, Information Services may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 32.5x, since almost half of all companies in Canada have P/E ratios under 16x and even P/E's lower than 9x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.
Information Services certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.
View our latest analysis for Information Services
Does Growth Match The High P/E?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Information Services' to be considered reasonable.
Retrospectively, the last year delivered an exceptional 28% gain to the company's bottom line. Still, incredibly EPS has fallen 31% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Turning to the outlook, the next year should generate growth of 15% as estimated by the six analysts watching the company. With the market predicted to deliver 24% growth , the company is positioned for a weaker earnings result.
In light of this, it's alarming that Information Services' P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.
What We Can Learn From Information Services' P/E?
The strong share price surge has got Information Services' P/E rushing to great heights as well. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
We've established that Information Services currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.
You should always think about risks. Case in point, we've spotted 1 warning sign for Information Services you should be aware of.
If these risks are making you reconsider your opinion on Information Services, explore our interactive list of high quality stocks to get an idea of what else is out there.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.