Optimistic Investors Push Playa Hotels & Resorts N.V. (NASDAQ:PLYA) Shares Up 27% But Growth Is Lacking

Despite an already strong run, Playa Hotels & Resorts N.V. (NASDAQ:PLYA) shares have been powering on, with a gain of 27% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 43% in the last year.

Following the firm bounce in price, Playa Hotels & Resorts' price-to-earnings (or "P/E") ratio of 22.8x might make it look like a sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 18x and even P/E's below 11x are quite common. 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.

Playa Hotels & Resorts 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Playa Hotels & Resorts

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Playa Hotels & Resorts.

Is There Enough Growth For Playa Hotels & Resorts?

In order to justify its P/E ratio, Playa Hotels & Resorts would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered an exceptional 97% gain to the company's bottom line. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Shifting to the future, estimates from the five analysts covering the company suggest earnings growth is heading into negative territory, declining 2.9% over the next year. That's not great when the rest of the market is expected to grow by 15%.

In light of this, it's alarming that Playa Hotels & Resorts' P/E sits above the majority of other companies. 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 Bottom Line On Playa Hotels & Resorts' P/E

The large bounce in Playa Hotels & Resorts' shares has lifted the company's P/E to a fairly high level. 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 Playa Hotels & Resorts 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.

You need to take note of risks, for example - Playa Hotels & Resorts has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

Of course, you might also be able to find a better stock than Playa Hotels & Resorts. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.