Carter’s, Inc.’s (NYSE:CRI) price-to-earnings (or “P/E”) ratio of 25.7x might make it look like a strong sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 16x and even P/E’s below 9x are quite common. Nonetheless, we’d need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
Carter’s hasn’t been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.free report on Carter’s.
What Are Growth Metrics Telling Us About The High P/E?
Carter’s’ P/E ratio would be typical for a company that’s expected to deliver very strong growth, and importantly, perform much better than the market.
Retrospectively, the last year delivered a frustrating 43% decrease to the company’s bottom line. As a result, earnings from three years ago have also fallen 33% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 25% per annum during the coming three years according to the seven analysts following the company. With the market only predicted to deliver 10.0% per year, the company is positioned for a stronger earnings result.
With this information, we can see why Carter’s is trading at such a high P/E compared to the market. Apparently shareholders aren’t keen to offload something that is potentially eyeing a more prosperous future.
The Bottom Line On Carter’s’ P/E
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 Carter’s’ analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren’t under threat. Unless these conditions change, they will continue to provide strong support to the share price.
Don’t forget that there may be other risks. For instance, we’ve identified 3 warning signs for Carter’s that you should be aware of.
If you’re unsure about the strength of Carter’s’ 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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