Tiger Brands Limited (JSE:TBS) Not Lagging Market On Growth Or Pricing

By
Simply Wall St
Published
May 14, 2022
JSE:TBS
Source: Shutterstock

Tiger Brands Limited's (JSE:TBS) price-to-earnings (or "P/E") ratio of 12.8x might make it look like a sell right now compared to the market in South Africa, where around half of the companies have P/E ratios below 9x and even P/E's below 5x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Tiger Brands could be doing better as it's been growing earnings less than most other companies lately. One possibility is that the P/E is high because investors think this lacklustre earnings performance will improve markedly. If not, then existing shareholders may be very nervous about the viability of the share price.

See our latest analysis for Tiger Brands

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JSE:TBS Price Based on Past Earnings May 14th 2022
Keen to find out how analysts think Tiger Brands' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For Tiger Brands?

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

Retrospectively, the last year delivered an exceptional 21% gain to the company's bottom line. Still, incredibly EPS has fallen 28% 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.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 14% each year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 11% per annum, which is noticeably less attractive.

With this information, we can see why Tiger Brands is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

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.

As we suspected, our examination of Tiger Brands' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Tiger Brands, and understanding them should be part of your investment process.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).

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