Subdued Growth No Barrier To Ligand Pharmaceuticals Incorporated (NASDAQ:LGND) With Shares Advancing 27%

Ligand Pharmaceuticals Incorporated (NASDAQ:LGND) shares have had a really impressive month, gaining 27% after a shaky period beforehand. Taking a wider view, although not as strong as the last month, the full year gain of 17% is also fairly reasonable.

Even after such a large jump in price, there still wouldn't be many who think Ligand Pharmaceuticals' price-to-earnings (or "P/E") ratio of 16.3x 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.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Ligand Pharmaceuticals has been doing quite well of late. It might be that many expect the strong earnings performance to deteriorate like the rest, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

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.

How Is Ligand Pharmaceuticals' Growth Trending?

The only time you'd be comfortable seeing a P/E like Ligand Pharmaceuticals' is when the company's growth is tracking the market closely.

Taking a look back first, we see that the company grew earnings per share by an impressive 82% last year. Pleasingly, EPS has also lifted 121% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the four analysts covering the company suggest earnings growth is heading into negative territory, declining 17% over the next year. Meanwhile, the broader market is forecast to expand by 13%, which paints a poor picture.

In light of this, it's somewhat alarming that Ligand Pharmaceuticals' P/E sits in line with the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. 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 negative growth outlook.

The Final Word

Ligand Pharmaceuticals' stock has a lot of momentum behind it lately, which has brought its P/E level with the market. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Ligand Pharmaceuticals currently trades on a higher than expected P/E for a company whose earnings are forecast to decline. Right now we are uncomfortable with the P/E as the predicted future earnings are unlikely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you settle on your opinion, we've discovered 4 warning signs for Ligand Pharmaceuticals (2 can't be ignored!) that you should be aware of.

If these risks are making you reconsider your opinion on Ligand Pharmaceuticals, explore our interactive list of high quality stocks to get an idea of what else is out there.

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

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.