The Chefs' Warehouse, Inc. (NASDAQ:CHEF) Looks Just Right With A 25% Price Jump

The Chefs' Warehouse, Inc. (NASDAQ:CHEF) shareholders would be excited to see that the share price has had a great month, posting a 25% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 62%.

After such a large jump in price, Chefs' Warehouse's price-to-earnings (or "P/E") ratio of 39.5x might make it look like a strong sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 17x and even P/E's below 10x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Our free stock report includes 2 warning signs investors should be aware of before investing in Chefs' Warehouse. Read for free now.

Chefs' Warehouse certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Chefs' Warehouse

Keen to find out how analysts think Chefs' Warehouse's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Chefs' Warehouse's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 80% gain to the company's bottom line. Pleasingly, EPS has also lifted 302% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 14% per annum as estimated by the eight analysts watching the company. That's shaping up to be materially higher than the 10% per year growth forecast for the broader market.

In light of this, it's understandable that Chefs' Warehouse's 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.

The Key Takeaway

Shares in Chefs' Warehouse have built up some good momentum lately, which has really inflated its 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.

As we suspected, our examination of Chefs' Warehouse's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

It is also worth noting that we have found 2 warning signs for Chefs' Warehouse (1 can't be ignored!) that you need to take into consideration.

If these risks are making you reconsider your opinion on Chefs' Warehouse, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.