Lojas Renner S.A.'s (BVMF:LREN3) Price Is Out Of Tune With Earnings

It's not a stretch to say that Lojas Renner S.A.'s (BVMF:LREN3) price-to-earnings (or "P/E") ratio of 11.2x right now seems quite "middle-of-the-road" compared to the market in Brazil, where the median P/E ratio is around 10x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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Recent times have been advantageous for Lojas Renner as its earnings have been rising faster than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Check out our latest analysis for Lojas Renner

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Lojas Renner.

How Is Lojas Renner's Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like Lojas Renner's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 15%. The latest three year period has also seen a 24% overall rise in EPS, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 12% per year as estimated by the eleven analysts watching the company. That's shaping up to be materially lower than the 16% per annum growth forecast for the broader market.

With this information, we find it interesting that Lojas Renner is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

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.

Our examination of Lojas Renner's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 1 warning sign for Lojas Renner that you should be aware of.

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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.