Installed Building Products, Inc.'s (NYSE:IBP) Share Price Not Quite Adding Up

With a price-to-earnings (or "P/E") ratio of 23.9x Installed Building Products, Inc. (NYSE:IBP) may be sending bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 19x and even P/E's lower than 11x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Recent earnings growth for Installed Building Products has been in line with the market. One possibility is that the P/E is high because investors think this modest earnings performance will accelerate. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Installed Building Products

Keen to find out how analysts think Installed Building Products' 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?

There's an inherent assumption that a company should outperform the market for P/E ratios like Installed Building Products' to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 3.0% last year. This was backed up an excellent period prior to see EPS up by 128% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 8.0% during the coming year according to the eleven analysts following 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 Installed Building Products' 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. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Installed Building Products' P/E

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.

We've established that Installed Building Products currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. 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.

Plus, you should also learn about this 1 warning sign we've spotted with Installed Building Products.

Of course, you might also be able to find a better stock than Installed Building Products. 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.