What Liberty Broadband Corporation's (NASDAQ:LBRD.K) 31% Share Price Gain Is Not Telling You

Despite an already strong run, Liberty Broadband Corporation (NASDAQ:LBRD.K) shares have been powering on, with a gain of 31% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 21% is also fairly reasonable.

In spite of the firm bounce in price, it's still not a stretch to say that Liberty Broadband's price-to-earnings (or "P/E") ratio of 18x right now seems quite "middle-of-the-road" compared to the market in the United States, where the median P/E ratio is around 19x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Liberty Broadband's earnings growth of late has been pretty similar to most other companies. It seems that many are expecting the mediocre earnings performance to persist, which has held the P/E back. If this is the case, then at least existing shareholders won't be losing sleep over the current share price.

See our latest analysis for Liberty Broadband

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Liberty Broadband.

What Are Growth Metrics Telling Us About The P/E?

In order to justify its P/E ratio, Liberty Broadband would need to produce growth that's similar to the market.

If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. Still, the latest three year period has seen an excellent 137% overall rise in EPS, in spite of its uninspiring short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 4.8% each year over the next three years. With the market predicted to deliver 11% growth per year, the company is positioned for a weaker earnings result.

With this information, we find it interesting that Liberty Broadband is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Key Takeaway

Liberty Broadband appears to be back in favour with a solid price jump getting its P/E back in line with 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 Liberty Broadband currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Liberty Broadband with six simple checks will allow you to discover any risks that could be an issue.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.