Hercules Site Services Plc's (LON:HERC) 35% Price Boost Is Out Of Tune With Earnings

Hercules Site Services Plc (LON:HERC) shareholders have had their patience rewarded with a 35% share price jump in the last month. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 41% in the last twelve months.

Following the firm bounce in price, Hercules Site Services may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 27.2x, since almost half of all companies in the United Kingdom have P/E ratios under 14x and even P/E's lower than 9x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times have been pleasing for Hercules Site Services as its earnings have risen in spite of the market's earnings going into reverse. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Hercules Site Services

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

Does Growth Match The High P/E?

In order to justify its P/E ratio, Hercules Site Services would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 120%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 100% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 8.1% each year as estimated by the three analysts watching the company. With the market predicted to deliver 11% growth each year, the company is positioned for a weaker earnings result.

With this information, we find it concerning that Hercules Site Services is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

Shares in Hercules Site Services have built up some good momentum lately, which has really inflated its P/E. 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.

Our examination of Hercules Site Services' analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It is also worth noting that we have found 4 warning signs for Hercules Site Services (1 is a bit concerning!) that you need to take into consideration.

You might be able to find a better investment than Hercules Site Services. 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.