Stock Analysis

Investors Appear Satisfied With High Liner Foods Incorporated's (TSE:HLF) Prospects

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TSX:HLF
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When close to half the companies in Canada have price-to-earnings ratios (or "P/E's") below 15x, you may consider High Liner Foods Incorporated (TSE:HLF) as a stock to potentially avoid with its 18.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

While the market has experienced earnings growth lately, High Liner Foods' earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out our latest analysis for High Liner Foods

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TSX:HLF Price Based on Past Earnings August 12th 2020
Want the full picture on analyst estimates for the company? Then our free report on High Liner Foods will help you uncover what's on the horizon.

Does Growth Match The High P/E?

High Liner Foods' P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 54%. As a result, earnings from three years ago have also fallen 69% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 43% as estimated by the four analysts watching the company. With the market only predicted to deliver 5.3%, the company is positioned for a stronger earnings result.

In light of this, it's understandable that High Liner Foods' P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of High Liner Foods' 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. It's hard to see the share price falling strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 4 warning signs for High Liner Foods (1 is a bit concerning!) that you need to be mindful of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).

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