It's Down 29% But LPL Financial Holdings Inc. (NASDAQ:LPLA) Could Be Riskier Than It Looks

The LPL Financial Holdings Inc. (NASDAQ:LPLA) share price has fared very poorly over the last month, falling by a substantial 29%. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 14% in that time.

Since its price has dipped substantially, given about half the companies in the United States have price-to-earnings ratios (or "P/E's") above 18x, you may consider LPL Financial Holdings as an attractive investment with its 15.2x 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 limited.

Recent times haven't been advantageous for LPL Financial Holdings as its earnings have been falling quicker than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

See our latest analysis for LPL Financial Holdings

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

Is There Any Growth For LPL Financial Holdings?

In order to justify its P/E ratio, LPL Financial Holdings would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 13%. Even so, admirably EPS has lifted 124% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Shifting to the future, estimates from the ten analysts covering the company suggest earnings should grow by 18% each year over the next three years. That's shaping up to be materially higher than the 10% per annum growth forecast for the broader market.

With this information, we find it odd that LPL Financial Holdings is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Final Word

LPL Financial Holdings' recently weak share price has pulled its P/E below most other companies. 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.

We've established that LPL Financial Holdings currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

Before you take the next step, you should know about the 1 warning sign for LPL Financial Holdings that we have uncovered.

If these risks are making you reconsider your opinion on LPL Financial Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.

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

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