Bath & Body Works, Inc.'s (NYSE:BBWI) Shares Bounce 31% But Its Business Still Trails The Market

Bath & Body Works, Inc. (NYSE:BBWI) shares have continued their recent momentum with a 31% gain in the last month alone. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Although its price has surged higher, Bath & Body Works may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 9.2x, since almost half of all companies in the United States have P/E ratios greater than 20x and even P/E's higher than 35x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Bath & Body Works 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 low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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How Is Bath & Body Works' Growth Trending?

In order to justify its P/E ratio, Bath & Body Works would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered an exceptional 28% gain to the company's bottom line. As a result, it also grew EPS by 12% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 0.2% per year during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 11% per annum growth forecast for the broader market.

In light of this, it's understandable that Bath & Body Works' P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

Even after such a strong price move, Bath & Body Works' 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.

We've established that Bath & Body Works 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. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you take the next step, you should know about the 3 warning signs for Bath & Body Works (1 is significant!) that we have uncovered.

If you're unsure about the strength of Bath & Body Works' 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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