Little Excitement Around Legacy Housing Corporation's (NASDAQ:LEGH) Earnings

With a price-to-earnings (or "P/E") ratio of 11.8x Legacy Housing Corporation (NASDAQ:LEGH) may be sending bullish signals at the moment, given that almost half of all companies in the United States have P/E ratios greater than 18x and even P/E's higher than 32x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Legacy Housing has been struggling lately as its earnings have declined faster than most other companies. 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.

View our latest analysis for Legacy Housing

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

How Is Legacy Housing's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Legacy Housing's to be considered reasonable.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 22%. Even so, admirably EPS has lifted 34% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 6.4% per year over the next three years. Meanwhile, the rest of the market is forecast to expand by 10% per annum, which is noticeably more attractive.

In light of this, it's understandable that Legacy Housing's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Bottom Line On Legacy Housing's P/E

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.

As we suspected, our examination of Legacy Housing's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Legacy Housing with six simple checks on some of these key factors.

Of course, you might also be able to find a better stock than Legacy Housing. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.

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