Investors Still Waiting For A Pull Back In Deluxe Corporation (NYSE:DLX)

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider Deluxe Corporation (NYSE:DLX) as a stock to avoid entirely with its 31.2x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Deluxe has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.

See our latest analysis for Deluxe

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

Is There Enough Growth For Deluxe?

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

Retrospectively, the last year delivered a frustrating 51% decrease to the company's bottom line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 14% overall rise in EPS. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 66% over the next year. Meanwhile, the rest of the market is forecast to only expand by 10%, which is noticeably less attractive.

With this information, we can see why Deluxe is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Deluxe's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 4 warning signs for Deluxe you should be aware of, and 1 of them doesn't sit too well with us.

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.