Subdued Growth No Barrier To Turning Point Brands, Inc. (NYSE:TPB) With Shares Advancing 25%

Turning Point Brands, Inc. (NYSE:TPB) shareholders have had their patience rewarded with a 25% share price jump in the last month. The annual gain comes to 208% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, Turning Point Brands' price-to-earnings (or "P/E") ratio of 26x 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. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Turning Point Brands certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Turning Point Brands

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Does Growth Match The High P/E?

In order to justify its P/E ratio, Turning Point Brands would need to produce impressive growth in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 292% last year. Still, incredibly EPS has fallen 7.2% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 14% during the coming year according to the four analysts following the company. That's shaping up to be similar to the 14% growth forecast for the broader market.

With this information, we find it interesting that Turning Point Brands is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Final Word

Turning Point Brands' P/E is getting right up there since its shares have risen strongly. 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 Turning Point Brands currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Turning Point Brands that you should be aware of.

You might be able to find a better investment than Turning Point Brands. 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.