Nasdaq
华尔街日报IPD Group Limited's (ASX:IPG) Price Is Right But Growth Is Lacking After Shares Rocket 26%
IPD Group Limited (ASX:IPG) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. Notwithstanding the latest gain, the annual share price return of 8.7% isn't as impressive.
Even after such a large jump in price, IPD Group's price-to-earnings (or "P/E") ratio of 16.4x might still make it look like a buy right now compared to the market in Australia, where around half of the companies have P/E ratios above 22x and even P/E's above 40x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
With earnings growth that's inferior to most other companies of late, IPD Group has been relatively sluggish. It seems that many are expecting the uninspiring earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.
See our latest analysis for IPD Group
Does Growth Match The Low P/E?
The only time you'd be truly comfortable seeing a P/E as low as IPD Group's is when the company's growth is on track to lag the market.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 8.5% last year. Pleasingly, EPS has also lifted 76% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Looking ahead now, EPS is anticipated to climb by 8.7% each year during the coming three years according to the five analysts following the company. That's shaping up to be materially lower than the 18% each year growth forecast for the broader market.
In light of this, it's understandable that IPD Group's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.
The Bottom Line On IPD Group's P/E
The latest share price surge wasn't enough to lift IPD Group's P/E close to the market median. 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.
As we suspected, our examination of IPD Group's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. 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.
The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for IPD Group with six simple checks on some of these key factors.
Of course, you might also be able to find a better stock than IPD Group. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.