Abercrombie & Fitch Co. (NYSE:ANF) Looks Inexpensive After Falling 27% But Perhaps Not Attractive Enough

Abercrombie & Fitch Co. (NYSE:ANF) shares have had a horrible month, losing 27% after a relatively good period beforehand. The last month has meant the stock is now only up 8.5% during the last year.

Although its price has dipped substantially, Abercrombie & Fitch may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 10.8x, since almost half of all companies in the United States have P/E ratios greater than 19x and even P/E's higher than 34x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

With earnings growth that's superior to most other companies of late, Abercrombie & Fitch has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive 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 out of favour.

See our latest analysis for Abercrombie & Fitch

Want the full picture on analyst estimates for the company? Then our free report on Abercrombie & Fitch will help you uncover what's on the horizon.

How Is Abercrombie & Fitch's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Abercrombie & Fitch's is when the company's growth is on track to lag the market.

If we review the last year of earnings growth, the company posted a terrific increase of 146%. Pleasingly, EPS has also lifted 134% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 5.1% during the coming year according to the ten analysts following the company. That's shaping up to be materially lower than the 15% growth forecast for the broader market.

With this information, we can see why Abercrombie & Fitch is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From Abercrombie & Fitch's P/E?

The softening of Abercrombie & Fitch's shares means its P/E is now sitting at a pretty low level. 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 Abercrombie & Fitch maintains its low P/E on the weakness of its forecast growth being lower than the wider market, 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.

Before you settle on your opinion, we've discovered 1 warning sign for Abercrombie & Fitch that you should be aware of.

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.