Wesco Holdings Inc. (TSE:6091) Looks Inexpensive After Falling 27% But Perhaps Not Attractive Enough

Wesco Holdings Inc. (TSE:6091) shareholders won't be pleased to see that the share price has had a very rough month, dropping 27% and undoing the prior period's positive performance. Indeed, the recent drop has reduced its annual gain to a relatively sedate 2.9% over the last twelve months.

After such a large drop in price, Wesco Holdings may be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 9.4x, since almost half of all companies in Japan have P/E ratios greater than 14x and even P/E's higher than 21x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

The earnings growth achieved at Wesco Holdings over the last year would be more than acceptable for most companies. It might be that many expect the respectable earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

See our latest analysis for Wesco 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 Wesco Holdings' earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as Wesco Holdings' is when the company's growth is on track to lag the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 21% last year. As a result, it also grew EPS by 17% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

This is in contrast to the rest of the market, which is expected to grow by 9.8% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Wesco Holdings' P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Key Takeaway

Wesco Holdings' P/E has taken a tumble along with its share price. 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.

As we suspected, our examination of Wesco Holdings 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.

You should always think about risks. Case in point, we've spotted 2 warning signs for Wesco Holdings you should be aware of, and 1 of them shouldn't be ignored.

If you're unsure about the strength of Wesco 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. 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