El Al Israel Airlines Ltd.'s (TLV:ELAL) Share Price Boosted 35% But Its Business Prospects Need A Lift Too

El Al Israel Airlines Ltd. (TLV:ELAL) shareholders have had their patience rewarded with a 35% share price jump in the last month. The last month tops off a massive increase of 161% in the last year.

Although its price has surged higher, El Al Israel Airlines' price-to-earnings (or "P/E") ratio of 2.5x might still make it look like a strong buy right now compared to the market in Israel, where around half of the companies have P/E ratios above 15x and even P/E's above 23x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

El Al Israel Airlines certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform 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 out of favour.

View our latest analysis for El Al Israel Airlines

Although there are no analyst estimates available for El Al Israel Airlines, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as depressed as El Al Israel Airlines' is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered an exceptional 306% gain to the company's bottom line. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 25% shows it's noticeably less attractive on an annualised basis.

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

The Final Word

Shares in El Al Israel Airlines are going to need a lot more upward momentum to get the company's P/E out of its slump. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of El Al Israel Airlines revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for El Al Israel Airlines (1 shouldn't be ignored) you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.