Improved Earnings Required Before Smiths News plc (LON:SNWS) Stock's 28% Jump Looks Justified

Smiths News plc (LON:SNWS) shareholders have had their patience rewarded with a 28% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 25% in the last year.

In spite of the firm bounce in price, Smiths News may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 6.3x, since almost half of all companies in the United Kingdom have P/E ratios greater than 17x and even P/E's higher than 29x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

With earnings that are retreating more than the market's of late, Smiths News has been very sluggish. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

Check out our latest analysis for Smiths News

Want the full picture on analyst estimates for the company? Then our free report on Smiths News will help you uncover what's on the horizon.

Is There Any Growth For Smiths News?

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

Retrospectively, the last year delivered a frustrating 7.9% decrease to the company's bottom line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 17% overall rise in EPS. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 0.1% per year during the coming three years according to the three analysts following the company. With the market predicted to deliver 15% growth per annum, the company is positioned for a weaker earnings result.

In light of this, it's understandable that Smiths News' P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On Smiths News' P/E

Shares in Smiths News are going to need a lot more upward momentum to get the company's P/E out of its slump. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Smiths News maintains its low P/E on the weakness of its forecast growth being lower than the wider market, 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.

Having said that, be aware Smiths News is showing 3 warning signs in our investment analysis, you should know about.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.