How Does Chefs' Warehouse's (NASDAQ:CHEF) P/E Compare To Its Industry, After The Share Price Drop?

By
Simply Wall St
Published
March 07, 2020

Unfortunately for some shareholders, the Chefs' Warehouse (NASDAQ:CHEF) share price has dived 33% in the last thirty days. The recent drop has obliterated the annual return, with the share price now down 14% over that longer period.

Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

View our latest analysis for Chefs' Warehouse

Does Chefs' Warehouse Have A Relatively High Or Low P/E For Its Industry?

Chefs' Warehouse's P/E of 32.01 indicates some degree of optimism towards the stock. The image below shows that Chefs' Warehouse has a higher P/E than the average (19.1) P/E for companies in the consumer retailing industry.

NasdaqGS:CHEF Price Estimation Relative to Market, March 7th 2020

Chefs' Warehouse's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Chefs' Warehouse increased earnings per share by an impressive 15% over the last twelve months. And its annual EPS growth rate over 5 years is 7.3%. With that performance, you might expect an above average P/E ratio.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

Is Debt Impacting Chefs' Warehouse's P/E?

Net debt is 30% of Chefs' Warehouse's market cap. While it's worth keeping this in mind, it isn't a worry.

The Bottom Line On Chefs' Warehouse's P/E Ratio

Chefs' Warehouse has a P/E of 32.0. That's higher than the average in its market, which is 16.2. The company is not overly constrained by its modest debt levels, and its recent EPS growth very solid. So on this analysis it seems reasonable that its P/E ratio is above average. Given Chefs' Warehouse's P/E ratio has declined from 47.6 to 32.0 in the last month, we know for sure that the market is significantly less confident about the business today, than it was back then. For those who don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.

When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

Of course you might be able to find a better stock than Chefs' Warehouse. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.

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