Turning Point Brands, Inc.'s (NYSE:TPB) 26% Share Price Surge Not Quite Adding Up

Explore Turning Point Brands's Fair Values from the Community and select yours

Turning Point Brands, Inc. (NYSE:TPB) shares have continued their recent momentum with a 26% gain in the last month alone. The last month tops off a massive increase of 151% in the last year.

Following the firm bounce in price, Turning Point Brands' price-to-earnings (or "P/E") ratio of 34.7x might make it look like a strong 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 so lofty.

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Turning Point Brands' earnings growth of late has been pretty similar to most other companies. One possibility is that the P/E is high because investors think this modest earnings performance will accelerate. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for Turning Point Brands

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Does Growth Match The High P/E?

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

Retrospectively, the last year delivered a decent 9.2% gain to the company's bottom line. EPS has also lifted 27% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 14% during the coming year according to the five analysts following the company. Meanwhile, the rest of the market is forecast to expand by 15%, which is not materially different.

In light of this, it's curious that Turning Point Brands' P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

Turning Point Brands' P/E is flying high just like its stock has during the last month. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Turning Point Brands' analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. 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. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Turning Point Brands, and understanding these should be part of your investment process.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.