Improved Earnings Required Before Tourism Holdings Limited (NZSE:THL) Stock’s 37% Jump Looks Justified

Tourism Holdings Limited (NZSE:THL) shareholders would be excited to see that the share price has had a great month, posting a 37% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 44% over that time.

In spite of the firm bounce in price, Tourism Holdings may still be sending bullish signals at the moment with its price-to-earnings (or “P/E”) ratio of 12.8x, since almost half of all companies in New Zealand have P/E ratios greater than 23x and even P/E’s higher than 38x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it’s justified.

Tourism Holdings has been struggling lately as its earnings have declined faster than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. You’d much rather the company wasn’t bleeding earnings if you still believe in the business. Or at the very least, you’d be hoping the earnings slide doesn’t get any worse if your plan is to pick up some stock while it’s out of favour.

View our latest analysis for Tourism Holdings

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NZSE:THL Price Based on Past Earnings September 18th 2020
Keen to find out how analysts think Tourism Holdings’ future stacks up against the industry? In that case, our free report is a great place to start.

What Are Growth Metrics Telling Us About The Low P/E?

The only time you’d be truly comfortable seeing a P/E as low as Tourism Holdings’ is when the company’s growth is on track to lag the market.

If we review the last year of earnings, dishearteningly the company’s profits fell to the tune of 60%. This means it has also seen a slide in earnings over the longer-term as EPS is down 28% in total over the last three years. Therefore, it’s fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 7.1% each year during the coming three years according to the three analysts following the company. That’s not great when the rest of the market is expected to grow by 11% per year.

In light of this, it’s understandable that Tourism Holdings’ 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. There’s potential for the P/E to fall to even lower levels if the company doesn’t improve its profitability.

The Bottom Line On Tourism Holdings’ P/E

Despite Tourism Holdings’ shares building up a head of steam, its P/E still lags most other companies. 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 Tourism Holdings 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. It’s hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we’ve spotted 3 warning signs for Tourism Holdings (of which 1 shouldn’t be ignored!) you should know about.

If you’re unsure about the strength of Tourism Holdings’ business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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