Hays plc’s (LON:HAS) price-to-earnings (or “P/E”) ratio of 11.1x might make it look like a buy right now compared to the market in the United Kingdom, where around half of the companies have P/E ratios above 16x and even P/E’s above 32x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it’s justified.
Recent times haven’t been advantageous for Hays as its earnings have been falling quicker 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.
Check out our latest analysis for Hays
How Is Hays’ Growth Trending?
In order to justify its P/E ratio, Hays would need to produce sluggish growth that’s trailing the market.
Taking a look back first, the company’s earnings per share growth last year wasn’t something to get excited about as it posted a disappointing decline of 17%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 9.1% in total. 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 10% per year during the coming three years according to the ten analysts following the company. That’s not great when the rest of the market is expected to grow by 11% per annum.
In light of this, it’s understandable that Hays’ 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
It’s argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
We’ve established that Hays 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.
We don’t want to rain on the parade too much, but we did also find 2 warning signs for Hays that you need to be mindful of.
You might be able to find a better investment than Hays. 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).
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