It's Down 38% But Victoria's Secret & Co. (NYSE:VSCO) Could Be Riskier Than It Looks

Victoria's Secret & Co. (NYSE:VSCO) shareholders that were waiting for something to happen have been dealt a blow with a 38% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 43% share price drop.

In spite of the heavy fall in price, Victoria's Secret's price-to-earnings (or "P/E") ratio of 12.8x might still make it look like a 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 32x are quite common. 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 that are retreating more than the market's of late, Victoria's Secret has been very sluggish. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

Check out our latest analysis for Victoria's Secret

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

How Is Victoria's Secret's Growth Trending?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 67%. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Shifting to the future, estimates from the ten analysts covering the company suggest earnings should grow by 18% per annum over the next three years. With the market only predicted to deliver 11% per annum, the company is positioned for a stronger earnings result.

In light of this, it's peculiar that Victoria's Secret's P/E sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Key Takeaway

Victoria's Secret's P/E has taken a tumble along with its share price. 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.

Our examination of Victoria's Secret's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

Having said that, be aware Victoria's Secret is showing 4 warning signs in our investment analysis, and 1 of those is a bit unpleasant.

You might be able to find a better investment than Victoria's Secret. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.