Myer Holdings Limited (ASX:MYR) Looks Inexpensive But Perhaps Not Attractive Enough

With a price-to-earnings (or "P/E") ratio of 12.7x Myer Holdings Limited (ASX:MYR) may be sending bullish signals at the moment, given that almost half of all companies in Australia have P/E ratios greater than 20x and even P/E's higher than 36x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Recent times haven't been advantageous for Myer Holdings 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 Myer Holdings

Want the full picture on analyst estimates for the company? Then our free report on Myer Holdings will help you uncover what's on the horizon.

Is There Any Growth For Myer Holdings?

There's an inherent assumption that a company should underperform the market for P/E ratios like Myer Holdings' to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 44%. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 2.7% each year as estimated by the dual analysts watching the company. With the market predicted to deliver 17% growth per annum, the company is positioned for a weaker earnings result.

In light of this, it's understandable that Myer Holdings' P/E sits below the majority of other companies. 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

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Myer Holdings maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Myer Holdings you should know about.

You might be able to find a better investment than Myer Holdings. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.