Winnebago Industries, Inc. (NYSE:WGO) Could Be Riskier Than It Looks

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 18x, you may consider Winnebago Industries, Inc. (NYSE:WGO) as an attractive investment with its 10.6x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

With earnings that are retreating more than the market's of late, Winnebago Industries has been very sluggish. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. You'd much rather the company wasn't bleeding earnings if you still believe in the business. 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 Winnebago Industries

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Winnebago Industries.

Does Growth Match The Low P/E?

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

Retrospectively, the last year delivered a frustrating 45% decrease to the company's bottom line. Even so, admirably EPS has lifted 99% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Turning to the outlook, the next three years should generate growth of 31% each year as estimated by the twelve analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 12% per annum, which is noticeably less attractive.

With this information, we find it odd that Winnebago Industries is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Final Word

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.

We've established that Winnebago Industries currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

You always need to take note of risks, for example - Winnebago Industries has 2 warning signs we think you should be aware of.

You might be able to find a better investment than Winnebago Industries. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.