Ralph Lauren Corporation's (NYSE:RL) Price In Tune With Earnings

It's not a stretch to say that Ralph Lauren Corporation's (NYSE:RL) price-to-earnings (or "P/E") ratio of 20x right now seems quite "middle-of-the-road" compared to the market in the United States, where the median P/E ratio is around 20x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Ralph Lauren certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

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Does Growth Match The P/E?

In order to justify its P/E ratio, Ralph Lauren would need to produce growth that's similar to the market.

Retrospectively, the last year delivered an exceptional 34% gain to the company's bottom line. The latest three year period has also seen an excellent 101% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 12% per year over the next three years. With the market predicted to deliver 11% growth each year, the company is positioned for a comparable earnings result.

With this information, we can see why Ralph Lauren is trading at a fairly similar P/E to the market. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.

The Key Takeaway

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Ralph Lauren maintains its moderate P/E off the back of its forecast growth being in line with the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings won't throw up any surprises. Unless these conditions change, they will continue to support the share price at these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Ralph Lauren, and understanding them should be part of your investment process.

Of course, you might also be able to find a better stock than Ralph Lauren. 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.