Getting In Cheap On BJ's Wholesale Club Holdings, Inc. (NYSE:BJ) Is Unlikely

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 19.9x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

With its earnings growth in positive territory compared to the declining earnings of most other companies, BJ's Wholesale Club Holdings has been doing quite well of late. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

If you'd like to see what analysts are forecasting going forward, you should check out our free report on BJ's Wholesale Club Holdings.

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

In order to justify its P/E ratio, BJ's Wholesale Club Holdings would need to produce impressive growth in excess of the market.

If we review the last year of earnings growth, the company posted a worthy increase of 2.5%. The latest three year period has also seen a 27% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 0.03% as estimated by the analysts watching the company. With the market predicted to deliver 12% growth , that's a disappointing outcome.

With this information, we find it concerning that BJ's Wholesale Club Holdings is trading at a P/E higher than the market. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price. There's a very good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

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 BJ's Wholesale Club Holdings currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. When we see a poor outlook with earnings heading backwards, 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.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for BJ's Wholesale Club Holdings that you should be aware of.

If these risks are making you reconsider your opinion on BJ's Wholesale Club Holdings, 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.