When close to half the companies in the United Kingdom have price-to-earnings ratios (or “P/E’s”) above 17x, you may consider Taylor Wimpey plc (LON:TW.) as an attractive investment with its 9.8x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it’s justified.
With earnings that are retreating more than the market’s of late, Taylor Wimpey has been very sluggish. The P/E is probably low because investors think this poor earnings performance isn’t going to improve at all. You’d much rather the company wasn’t bleeding earnings if you still believe in the business. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.
View our latest analysis for Taylor Wimpey
How Is Taylor Wimpey’s Growth Trending?
Taylor Wimpey’s P/E ratio would be typical for a company that’s only expected to deliver limited growth, and importantly, perform worse than 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 39%. As a result, earnings from three years ago have also fallen 26% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 10% per annum during the coming three years according to the analysts following the company. That’s shaping up to be materially lower than the 12% per year growth forecast for the broader market.
With this information, we can see why Taylor Wimpey is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.
The Key Takeaway
Using the price-to-earnings ratio alone to determine if you should sell your stock isn’t sensible, however it can be a practical guide to the company’s future prospects.
We’ve established that Taylor Wimpey maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. 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.
You should always think about risks. Case in point, we’ve spotted 2 warning signs for Taylor Wimpey you should be aware of.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a P/E below 20x.
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