Ligand Pharmaceuticals Incorporated (NASDAQ:LGND) Stock Rockets 25% As Investors Are Less Pessimistic Than Expected

Despite an already strong run, Ligand Pharmaceuticals Incorporated (NASDAQ:LGND) shares have been powering on, with a gain of 25% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 49% in the last year.

Although its price has surged higher, there still wouldn't be many who think Ligand Pharmaceuticals' price-to-earnings (or "P/E") ratio of 18.8x is worth a mention when the median P/E in the United States is similar at about 18x. 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.

Ligand Pharmaceuticals 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. One possibility is that the P/E is moderate because investors think the company's earnings will be less resilient moving forward. 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 not quite in favour.

View our latest analysis for Ligand Pharmaceuticals

Keen to find out how analysts think Ligand Pharmaceuticals' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Some Growth For Ligand Pharmaceuticals?

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

Retrospectively, the last year delivered an exceptional 82% gain to the company's bottom line. The latest three year period has also seen an excellent 121% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to slump, contracting by 13% during the coming year according to the three analysts following the company. With the market predicted to deliver 13% growth , that's a disappointing outcome.

In light of this, it's somewhat alarming that Ligand Pharmaceuticals' P/E sits in line with 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. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh on the share price eventually.

The Key Takeaway

Its shares have lifted substantially and now Ligand Pharmaceuticals' P/E is also back up to the market median. 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 Ligand Pharmaceuticals currently trades on a higher than expected P/E for a company whose earnings are forecast to decline. When we see a poor outlook with earnings heading backwards, we suspect 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.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Ligand Pharmaceuticals (2 can't be ignored) you should be aware of.

If you're unsure about the strength of Ligand Pharmaceuticals' 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com