Little Excitement Around Avid Bioservices, Inc.'s (NASDAQ:CDMO) Earnings As Shares Take 26% Pounding

Avid Bioservices, Inc. (NASDAQ:CDMO) shareholders won't be pleased to see that the share price has had a very rough month, dropping 26% and undoing the prior period's positive performance. Looking back over the past twelve months the stock has been a solid performer regardless, with a gain of 16%.

Since its price has dipped substantially, Avid Bioservices may be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 7.9x, since almost half of all companies in the United States have P/E ratios greater than 15x and even P/E's higher than 30x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Avid Bioservices certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for Avid Bioservices

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

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Avid Bioservices would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 1,076% gain to the company's bottom line. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Looking ahead now, EPS is anticipated to slump, contracting by 95% during the coming year according to the four analysts following the company. Meanwhile, the broader market is forecast to expand by 6.1%, which paints a poor picture.

In light of this, it's understandable that Avid Bioservices' P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

Avid Bioservices' recently weak share price has pulled its P/E below most other companies. 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 Avid Bioservices maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

And what about other risks? Every company has them, and we've spotted 5 warning signs for Avid Bioservices (of which 3 are concerning!) you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.