When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider Vail Resorts, Inc. (NYSE:MTN) as a stock to avoid entirely with its 37x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
Recent times haven't been advantageous for Vail Resorts as its earnings have been falling quicker than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.
Check out our latest analysis for Vail Resorts
Is There Enough Growth For Vail Resorts?
The only time you'd be truly comfortable seeing a P/E as steep as Vail Resorts' is when the company's growth is on track to outshine the market decidedly.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 32%. Still, the latest three year period has seen an excellent 372% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.
Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 25% each year over the next three years. With the market only predicted to deliver 10% per year, the company is positioned for a stronger earnings result.
In light of this, it's understandable that Vail Resorts' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Key Takeaway
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
As we suspected, our examination of Vail Resorts' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.
It is also worth noting that we have found 4 warning signs for Vail Resorts that you need to take into consideration.
You might be able to find a better investment than Vail Resorts. 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.
About NYSE:MTN
Vail Resorts
Through its subsidiaries, operates mountain resorts and regional ski areas in the United States and internationally.
Average dividend payer and fair value.
