Investors Don't See Light At End Of Bath & Body Works, Inc.'s (NYSE:BBWI) Tunnel And Push Stock Down 26%

Bath & Body Works, Inc. (NYSE:BBWI) shares have had a horrible month, losing 26% after a relatively good period beforehand. To make matters worse, the recent drop has wiped out a year's worth of gains with the share price now back where it started a year ago.

Although its price has dipped substantially, given about half the companies in the United States have price-to-earnings ratios (or "P/E's") above 17x, you may still consider Bath & Body Works as an attractive investment with its 9.7x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Bath & Body Works certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Bath & Body Works

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Bath & Body Works.

Does Growth Match The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like Bath & Body Works' to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 24%. Still, incredibly EPS has fallen 12% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 2.2% per annum during the coming three years according to the analysts following the company. With the market predicted to deliver 10% growth each year, the company is positioned for a weaker earnings result.

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

Bath & Body Works' recently weak share price has pulled its P/E below most other companies. 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You should always think about risks. Case in point, we've spotted 4 warning signs for Bath & Body Works you should be aware of, and 1 of them is potentially serious.

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.

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