When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 18x, you may consider U.S. Physical Therapy, Inc. (NYSE:USPH) as a stock to avoid entirely with its 39x 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.
U.S. Physical Therapy certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.free report on U.S. Physical Therapy will help you uncover what's on the horizon.
What Are Growth Metrics Telling Us About The High P/E?
U.S. Physical Therapy's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.
If we review the last year of earnings growth, the company posted a terrific increase of 32%. Pleasingly, EPS has also lifted 52% 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.
Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 7.1% per year over the next three years. That's shaping up to be materially lower than the 13% per annum growth forecast for the broader market.
In light of this, it's alarming that U.S. Physical Therapy's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.
The Final Word
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
We've established that U.S. Physical Therapy currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
You should always think about risks. Case in point, we've spotted 1 warning sign for U.S. Physical Therapy you should be aware of.
Of course, you might also be able to find a better stock than U.S. Physical Therapy. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.
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