Forestar Group Inc. (NYSE:FOR) Held Back By Insufficient Growth Even After Shares Climb 25%

Explore Forestar Group's Fair Values from the Community and select yours

Despite an already strong run, Forestar Group Inc. (NYSE:FOR) shares have been powering on, with a gain of 25% in the last thirty days. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 7.6% in the last twelve months.

In spite of the firm bounce in price, Forestar Group may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 8.2x, since almost half of all companies in the United States have P/E ratios greater than 19x and even P/E's higher than 33x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

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Forestar Group hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If you still 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.

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How Is Forestar Group's Growth Trending?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Forestar Group's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 17% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 7.5% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the four analysts covering the company suggest earnings growth is heading into negative territory, declining 5.7% over the next year. With the market predicted to deliver 14% growth , that's a disappointing outcome.

In light of this, it's understandable that Forestar Group's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

What We Can Learn From Forestar Group's P/E?

Even after such a strong price move, Forestar Group's P/E still trails the rest of the market significantly. 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.

As we suspected, our examination of Forestar Group's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

You always need to take note of risks, for example - Forestar Group has 2 warning signs we think you should be aware of.

Of course, you might also be able to find a better stock than Forestar Group. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.