BJ's Wholesale Club Holdings, Inc. (NYSE:BJ) Investors Are Less Pessimistic Than Expected

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 17x, you may consider BJ's Wholesale Club Holdings, Inc. (NYSE:BJ) as a stock to potentially avoid with its 21.6x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

BJ's Wholesale Club Holdings certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for BJ's Wholesale Club Holdings

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

How Is BJ's Wholesale Club Holdings' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as BJ's Wholesale Club Holdings' is when the company's growth is on track to outshine the market.

Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. Still, the latest three year period has seen an excellent 31% overall rise in EPS, in spite of its uninspiring short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 6.7% per year during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to expand by 11% each year, which is noticeably more attractive.

With this information, we find it concerning that BJ's Wholesale Club Holdings is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of BJ's Wholesale Club Holdings' analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

We don't want to rain on the parade too much, but we did also find 2 warning signs for BJ's Wholesale Club Holdings that you need to be mindful of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.