Stella-Jones Inc.'s (TSE:SJ) 25% Dip In Price Shows Sentiment Is Matching Earnings

The Stella-Jones Inc. (TSE:SJ) share price has fared very poorly over the last month, falling by a substantial 25%. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 19% in that time.

Even after such a large drop in price, Stella-Jones' price-to-earnings (or "P/E") ratio of 11.9x might still make it look like a buy right now compared to the market in Canada, where around half of the companies have P/E ratios above 15x and even P/E's above 31x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been pleasing for Stella-Jones as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Stella-Jones

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How Is Stella-Jones' Growth Trending?

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

If we review the last year of earnings growth, the company posted a worthy increase of 9.0%. This was backed up an excellent period prior to see EPS up by 58% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 0.05% during the coming year according to the eight analysts following the company. That's shaping up to be materially lower than the 25% growth forecast for the broader market.

In light of this, it's understandable that Stella-Jones' P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Stella-Jones' P/E?

Stella-Jones' P/E has taken a tumble along with its share price. 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 Stella-Jones 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. It's hard to see the share price rising strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Stella-Jones (at least 1 which is significant), and understanding these should be part of your investment process.

Of course, you might also be able to find a better stock than Stella-Jones. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.