It’s not a stretch to say that Standard Motor Products, Inc.’s (NYSE:SMP) price-to-earnings (or “P/E”) ratio of 17.1x right now seems quite “middle-of-the-road” compared to the market in the United States, where the median P/E ratio is around 18x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
Standard Motor Products has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is moderate because investors think the company’s earnings trend will eventually fall in line with most others in the market. 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 it doesn’t keep underperforming if your plan is to pick up some stock while it’s not in favour.free report on Standard Motor Products.
How Is Standard Motor Products’ Growth Trending?
The only time you’d be comfortable seeing a P/E like Standard Motor Products’ is when the company’s growth is tracking the market closely.
If we review the last year of earnings, dishearteningly the company’s profits fell to the tune of 13%. The last three years don’t look nice either as the company has shrunk EPS by 10% in aggregate. 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 23% as estimated by the three analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 5.4%, which is noticeably less attractive.
In light of this, it’s curious that Standard Motor Products’ P/E sits in line with the majority of other companies. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.
What We Can Learn From Standard Motor Products’ P/E?
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.
Our examination of Standard Motor Products’ analyst forecasts revealed that its superior earnings outlook isn’t contributing to its P/E as much as we would have predicted. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.
Don’t forget that there may be other risks. For instance, we’ve identified 1 warning sign for Standard Motor Products that you should be aware of.
If you’re unsure about the strength of Standard Motor Products’ 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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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.
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