Earnings Not Telling The Story For Diplomat Holdings Ltd (TLV:DIPL) After Shares Rise 27%

Diplomat Holdings Ltd (TLV:DIPL) shares have continued their recent momentum with a 27% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 50%.

Even after such a large jump in price, it's still not a stretch to say that Diplomat Holdings' price-to-earnings (or "P/E") ratio of 12x right now seems quite "middle-of-the-road" compared to the market in Israel, where the median P/E ratio is around 14x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

With earnings growth that's exceedingly strong of late, Diplomat Holdings has been doing very well. The P/E is probably moderate because investors think this strong earnings growth might not be enough to outperform the broader market in the near future. 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 not quite in favour.

See our latest analysis for Diplomat Holdings

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Diplomat Holdings' earnings, revenue and cash flow.

Is There Some Growth For Diplomat Holdings?

The only time you'd be comfortable seeing a P/E like Diplomat Holdings' is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered an exceptional 53% gain to the company's bottom line. Still, incredibly EPS has fallen 6.7% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 26% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Diplomat Holdings is trading at a fairly similar P/E to the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh on the share price eventually.

The Key Takeaway

Diplomat Holdings appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Diplomat Holdings revealed its shrinking earnings over the medium-term aren't impacting its P/E as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

Having said that, be aware Diplomat Holdings is showing 1 warning sign in our investment analysis, you should know about.

Of course, you might also be able to find a better stock than Diplomat Holdings. 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.