Market Participants Recognise Nordstrom, Inc.'s (NYSE:JWN) Earnings Pushing Shares 30% Higher

The Nordstrom, Inc. (NYSE:JWN) share price has done very well over the last month, posting an excellent gain of 30%. Notwithstanding the latest gain, the annual share price return of 7.7% isn't as impressive.

After such a large jump in price, Nordstrom may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 25.1x, since almost half of all companies in the United States have P/E ratios under 16x and even P/E's lower than 9x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Nordstrom hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

View our latest analysis for Nordstrom

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

Is There Enough Growth For Nordstrom?

The only time you'd be truly comfortable seeing a P/E as high as Nordstrom's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a frustrating 64% decrease to the company's bottom line. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 66% each year during the coming three years according to the analysts following the company. That's shaping up to be materially higher than the 13% per annum growth forecast for the broader market.

In light of this, it's understandable that Nordstrom's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Nordstrom's P/E

The large bounce in Nordstrom's shares has lifted the company's P/E to a fairly high 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 Nordstrom maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

And what about other risks? Every company has them, and we've spotted 5 warning signs for Nordstrom you should know about.

Of course, you might also be able to find a better stock than Nordstrom. 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.