Personal Group Holdings Plc's (LON:PGH) Shares Lagging The Market But So Is The Business

By
Simply Wall St
Published
September 14, 2020

When close to half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") above 17x, you may consider Personal Group Holdings Plc (LON:PGH) as an attractive investment with its 10.4x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Earnings have risen at a steady rate over the last year for Personal Group Holdings, which is generally not a bad outcome. One possibility is that the P/E is low because investors think this good earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders may have reason to be optimistic about the future direction of the share price.

View our latest analysis for Personal Group Holdings

AIM:PGH Price Based on Past Earnings September 14th 2020
Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Personal Group Holdings will help you shine a light on its historical performance.

Is There Any Growth For Personal Group Holdings?

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

If we review the last year of earnings growth, the company posted a worthy increase of 4.2%. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 4.4% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 2.3% shows it's an unpleasant look.

With this information, we are not surprised that Personal Group Holdings is trading at a P/E lower than the market. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From Personal Group Holdings' P/E?

The price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Personal Group Holdings revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Personal Group Holdings that you should be aware of.

If you're unsure about the strength of Personal Group Holdings' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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This article by Simply Wall St is general in nature. 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.
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