Improved Earnings Required Before M/I Homes, Inc. (NYSE:MHO) Shares Find Their Feet

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 19x, you may consider M/I Homes, Inc. (NYSE:MHO) as a highly attractive investment with its 6.7x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

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While the market has experienced earnings growth lately, M/I Homes' earnings have gone into reverse gear, which is not great. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

See our latest analysis for M/I Homes

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

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as depressed as M/I Homes' is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered a frustrating 1.3% decrease to the company's bottom line. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 28% in total. 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.

Turning to the outlook, the next three years should generate growth of 3.9% each year as estimated by the three analysts watching the company. With the market predicted to deliver 11% growth each year, the company is positioned for a weaker earnings result.

In light of this, it's understandable that M/I Homes' P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

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.

As we suspected, our examination of M/I Homes' analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you take the next step, you should know about the 1 warning sign for M/I Homes that we have uncovered.

If you're unsure about the strength of M/I Homes' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.