The North West Company Inc. (TSE:NWC) Soars 27% But It's A Story Of Risk Vs Reward

By
Simply Wall St
Published
September 28, 2020
TSX:NWC
Source: Shutterstock

The The North West Company Inc. (TSE:NWC) share price has done very well over the last month, posting an excellent gain of 27%. The last 30 days bring the annual gain to a very sharp 30%.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about North West's P/E ratio of 15.8x, since the median price-to-earnings (or "P/E") ratio in Canada is also close to 16x. 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.

The earnings growth achieved at North West over the last year would be more than acceptable for most companies. It might be that many expect the respectable earnings performance to wane, which has kept the P/E from rising. 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.

View our latest analysis for North West

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TSX:NWC Price Based on Past Earnings September 29th 2020
We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on North West's earnings, revenue and cash flow.

How Is North West's Growth Trending?

In order to justify its P/E ratio, North West would need to produce growth that's similar to the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 21% last year. The latest three year period has also seen an excellent 53% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Comparing that to the market, which is only predicted to deliver 9.3% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

With this information, we find it interesting that North West is trading at a fairly similar P/E to the market. Apparently some shareholders believe the recent performance is at its limits and have been accepting lower selling prices.

The Bottom Line On North West's P/E

Its shares have lifted substantially and now North West's P/E is also back up to the market median. 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 North West revealed its three-year earnings trends aren't contributing to its P/E as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued if recent medium-term earnings trends continue, but investors seem to think future earnings could see some volatility.

Having said that, be aware North West is showing 2 warning signs in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on North West, explore our interactive list of high quality stocks to get an idea of what else is out there.

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