BMC Stock Holdings, Inc.'s (NASDAQ:BMCH) Business Is Yet to Catch Up With Its Share Price

It's not a stretch to say that BMC Stock Holdings, Inc.'s (NASDAQ:BMCH) price-to-earnings (or "P/E") ratio of 14.6x right now seems quite "middle-of-the-road" compared to the market in the United States, where the median P/E ratio is around 16x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

While the market has experienced earnings growth lately, BMC Stock Holdings' earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to strengthen positively, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for BMC Stock Holdings

How Does BMC Stock Holdings' P/E Ratio Compare To Its Industry Peers?

It's plausible that BMC Stock Holdings' fairly average P/E ratio could be a result of tendencies within its own industry. The image below shows that the Trade Distributors industry as a whole also has a P/E ratio similar to the market. So we'd say there is merit in the premise that the company's ratio being shaped by its industry at this time. In the context of the Trade Distributors industry's current setting, most of its constituents' P/E's would be expected to be held back. Ultimately though, it's going to be the fundamentals of the business like earnings and growth that count most.

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

Does Growth Match The P/E?

There's an inherent assumption that a company should be matching the market for P/E ratios like BMC Stock Holdings' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 9.9% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 168% overall rise in EPS, in spite of its unsatisfying short-term performance. 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.

Shifting to the future, estimates from the ten analysts covering the company are not good at all, suggesting earnings should decline by 29% over the next year. With the rest of the market predicted to shrink by 13%, it's a sub-optimal result.

In light of this, it's somewhat peculiar that BMC Stock Holdings' P/E sits in line with the majority of other companies. When earnings shrink rapidly the P/E often shrinks too, which could set up shareholders for future disappointment. There's potential for the P/E to fall to lower levels if the company doesn't improve its profitability.

The Bottom Line On BMC Stock Holdings' P/E

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.

We've established that BMC Stock Holdings currently trades on a higher than expected P/E since its earnings forecast is even worse than the struggling market. When we see a weak earnings outlook, we suspect the share price is at risk of declining, sending the moderate P/E lower. We're also cautious about the company's ability to resist even greater pain to its business from the broader market turmoil. Unless the company's prospects improve, it's challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 2 warning signs for BMC Stock Holdings that you should be aware of.

Of course, you might also be able to find a better stock than BMC Stock Holdings. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.

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This article by Simply Wall St is general in nature. 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.
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