Market Cool On Franchise Group, Inc.'s (NASDAQ:FRG) Earnings

There wouldn't be many who think Franchise Group, Inc.'s (NASDAQ:FRG) price-to-earnings (or "P/E") ratio of 13x is worth a mention when the median P/E in the United States is similar at about 15x. 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.

Franchise Group certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Our analysis indicates that FRG is potentially undervalued!

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

What Are Growth Metrics Telling Us About The P/E?

The only time you'd be comfortable seeing a P/E like Franchise Group's 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 84% last year. The strong recent performance means it was also able to grow EPS by 3,807% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 19% each year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 8.9% per year, which is noticeably less attractive.

In light of this, it's curious that Franchise Group's P/E sits in line with the majority of other companies. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Key Takeaway

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 Franchise Group currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

Having said that, be aware Franchise Group is showing 2 warning signs in our investment analysis, you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.

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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.