Saga Communications, Inc.'s (NASDAQ:SGA) Popularity With Investors Under Threat As Stock Sinks 27%

Saga Communications, Inc. (NASDAQ:SGA) shareholders that were waiting for something to happen have been dealt a blow with a 27% share price drop in the last month. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 18% in that time.

In spite of the heavy fall in price, there still wouldn't be many who think Saga Communications' price-to-earnings (or "P/E") ratio of 15.4x is worth a mention when the median P/E in the United States is similar at about 17x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Saga Communications has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is moderate because investors think the company's earnings trend will eventually fall in line with most others in the market. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. Or at the very least, you'd be hoping it doesn't keep underperforming if your plan is to pick up some stock while it's not in favour.

See our latest analysis for Saga Communications

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

Is There Some Growth For Saga Communications?

There's an inherent assumption that a company should be matching the market for P/E ratios like Saga Communications' to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 22%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Shifting to the future, estimates from the lone analyst covering the company suggest earnings should grow by 9.0% over the next year. That's shaping up to be materially lower than the 13% growth forecast for the broader market.

In light of this, it's curious that Saga Communications' P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Bottom Line On Saga Communications' P/E

With its share price falling into a hole, the P/E for Saga Communications looks quite average now. 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 Saga Communications currently trades on a 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 moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You need to take note of risks, for example - Saga Communications has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

If you're unsure about the strength of Saga Communications' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.