Champion Homes, Inc.'s (NYSE:SKY) P/E Still Appears To Be Reasonable

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 17x, you may consider Champion Homes, Inc. (NYSE:SKY) as a stock to avoid entirely with its 31.2x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

We've discovered 1 warning sign about Champion Homes. View them for free.

While the market has experienced earnings growth lately, Champion Homes' earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Champion Homes

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

How Is Champion Homes' Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Champion Homes' 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 19%. As a result, earnings from three years ago have also fallen 16% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 33% as estimated by the six analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 14%, which is noticeably less attractive.

In light of this, it's understandable that Champion Homes' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Champion Homes' P/E?

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 Champion Homes maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Having said that, be aware Champion Homes is showing 1 warning sign in our investment analysis, you should know about.

You might be able to find a better investment than Champion Homes. 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.