Stock Analysis

Risks To Shareholder Returns Are Elevated At These Prices For McGrath RentCorp (NASDAQ:MGRC)

NasdaqGS:MGRC
Source: Shutterstock

McGrath RentCorp's (NASDAQ:MGRC) price-to-earnings (or "P/E") ratio of 22.6x might make it look like a sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 16x and even P/E's below 9x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, McGrath RentCorp has been doing quite well of late. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for McGrath RentCorp

pe-multiple-vs-industry
NasdaqGS:MGRC Price to Earnings Ratio vs Industry December 19th 2023
Want the full picture on analyst estimates for the company? Then our free report on McGrath RentCorp will help you uncover what's on the horizon.

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

The only time you'd be truly comfortable seeing a P/E as high as McGrath RentCorp's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered an exceptional 30% gain to the company's bottom line. As a result, it also grew EPS by 29% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 6.7% over the next year. That's shaping up to be materially lower than the 10% growth forecast for the broader market.

In light of this, it's alarming that McGrath RentCorp's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

What We Can Learn From McGrath RentCorp's 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.

Our examination of McGrath RentCorp's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You should always think about risks. Case in point, we've spotted 3 warning signs for McGrath RentCorp you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

Valuation is complex, but we're helping make it simple.

Find out whether McGrath RentCorp is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.