XPS Pensions Group plc (LON:XPS) Surges 25% Yet Its Low P/E Is No Reason For Excitement

XPS Pensions Group plc (LON:XPS) shares have continued their recent momentum with a 25% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 71% in the last year.

Although its price has surged higher, given about half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") above 17x, you may still consider XPS Pensions Group as an attractive investment with its 12.1x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

XPS Pensions Group certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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 out of favour.

View our latest analysis for XPS Pensions Group

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

Is There Any Growth For XPS Pensions Group?

In order to justify its P/E ratio, XPS Pensions Group would need to produce sluggish growth that's trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 240% last year. The strong recent performance means it was also able to grow EPS by 500% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the five analysts covering the company suggest earnings growth is heading into negative territory, declining 15% per annum over the next three years. That's not great when the rest of the market is expected to grow by 15% per annum.

With this information, we are not surprised that XPS Pensions Group is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Key Takeaway

The latest share price surge wasn't enough to lift XPS Pensions Group's P/E close to the market median. 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.

We've established that XPS Pensions Group maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Plus, you should also learn about these 3 warning signs we've spotted with XPS Pensions Group (including 1 which doesn't sit too well with us).

Of course, you might also be able to find a better stock than XPS Pensions Group. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com