Some Confidence Is Lacking In Portillo's Inc.'s (NASDAQ:PTLO) P/E

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 18x, you may consider Portillo's Inc. (NASDAQ:PTLO) as a stock to potentially avoid with its 21.2x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Portillo's as its earnings have been rising faster 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.

View our latest analysis for Portillo's

Want the full picture on analyst estimates for the company? Then our free report on Portillo's will help you uncover what's on the horizon.

Is There Enough Growth For Portillo's?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 53% last year. Pleasingly, EPS has also lifted 601% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 25% as estimated by the eleven analysts watching the company. That's not great when the rest of the market is expected to grow by 15%.

In light of this, it's alarming that Portillo's' 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 Key Takeaway

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Portillo's currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. 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 1 warning sign for Portillo's that you should be aware of.

You might be able to find a better investment than Portillo's. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.