Sally Beauty Holdings, Inc. (NYSE:SBH) Held Back By Insufficient Growth Even After Shares Climb 39%

Sally Beauty Holdings, Inc. (NYSE:SBH) shares have continued their recent momentum with a 39% gain in the last month alone. Unfortunately, despite the strong performance over the last month, the full year gain of 7.2% isn't as attractive.

Even after such a large jump in price, Sally Beauty Holdings' price-to-earnings (or "P/E") ratio of 7.5x might still make it look like a strong buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 17x and even P/E's above 33x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Sally Beauty Holdings 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.

See our latest analysis for Sally Beauty Holdings

Keen to find out how analysts think Sally Beauty Holdings' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Growth For Sally Beauty Holdings?

In order to justify its P/E ratio, Sally Beauty Holdings would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. Although pleasingly EPS has lifted 74% in aggregate from three years ago, notwithstanding the last 12 months. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next year should generate growth of 7.0% as estimated by the seven analysts watching the company. With the market predicted to deliver 10% growth , the company is positioned for a weaker earnings result.

In light of this, it's understandable that Sally Beauty Holdings' 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 Bottom Line On Sally Beauty Holdings' P/E

Shares in Sally Beauty Holdings are going to need a lot more upward momentum to get the company's P/E out of its slump. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Sally Beauty Holdings' analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. 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.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Sally Beauty Holdings that you need to be mindful of.

Of course, you might also be able to find a better stock than Sally Beauty Holdings. 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.