Cavco Industries, Inc.'s (NASDAQ:CVCO) 28% Share Price Surge Not Quite Adding Up

Cavco Industries, Inc. (NASDAQ:CVCO) shares have had a really impressive month, gaining 28% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 32% in the last year.

Since its price has surged higher, given around half the companies in the United States have price-to-earnings ratios (or "P/E's") below 19x, you may consider Cavco Industries as a stock to potentially avoid with its 22.3x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

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With earnings growth that's superior to most other companies of late, Cavco Industries has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Cavco Industries

Keen to find out how analysts think Cavco Industries' future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The High P/E?

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

If we review the last year of earnings growth, the company posted a terrific increase of 34%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 5.9% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 7.6% as estimated by the three analysts watching the company. With the market predicted to deliver 15% growth , the company is positioned for a weaker earnings result.

In light of this, it's alarming that Cavco Industries' 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 Cavco Industries' P/E?

Cavco Industries' P/E is getting right up there since its shares have risen strongly. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Cavco Industries' analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Cavco Industries with six simple checks will allow you to discover any risks that could be an issue.

You might be able to find a better investment than Cavco 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.