Lincoln Educational Services Corporation (NASDAQ:LINC) Stock Rockets 26% As Investors Are Less Pessimistic Than Expected

Lincoln Educational Services Corporation (NASDAQ:LINC) shares have continued their recent momentum with a 26% gain in the last month alone. The annual gain comes to 105% following the latest surge, making investors sit up and take notice.

Although its price has surged higher, it's still not a stretch to say that Lincoln Educational Services' price-to-earnings (or "P/E") ratio of 16.2x right now seems quite "middle-of-the-road" compared to the market in the United States, where the median P/E ratio is around 18x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Lincoln Educational Services 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 might be that many expect the strong earnings performance to deteriorate like the rest, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Lincoln Educational Services

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

How Is Lincoln Educational Services' Growth Trending?

In order to justify its P/E ratio, Lincoln Educational Services would need to produce growth that's similar to the market.

If we review the last year of earnings growth, the company posted a terrific increase of 153%. However, this wasn't enough as the latest three year period has seen a very unpleasant 51% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the four analysts covering the company suggest earnings growth is heading into negative territory, declining 53% over the next year. With the market predicted to deliver 12% growth , that's a disappointing outcome.

With this information, we find it concerning that Lincoln Educational Services is trading at a fairly similar P/E to the market. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. 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 negative growth outlook.

The Final Word

Its shares have lifted substantially and now Lincoln Educational Services' P/E is also back up to the market median. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Lincoln Educational Services' analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its P/E as much as we would have predicted. When we see a poor outlook with earnings heading backwards, we suspect share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 3 warning signs for Lincoln Educational Services you should be aware of, and 2 of them don't sit too well with us.

If you're unsure about the strength of Lincoln Educational Services' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com