The Greenbrier Companies, Inc. (NYSE:GBX) shares have had a really impressive month, gaining 27% after a shaky period beforehand. Taking a wider view, although not as strong as the last month, the full year gain of 13% is also fairly reasonable.
In spite of the firm bounce in price, Greenbrier Companies may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 7.8x, since almost half of all companies in the United States have P/E ratios greater than 19x and even P/E's higher than 34x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.
Greenbrier Companies certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
See our latest analysis for Greenbrier Companies
Does Growth Match The Low P/E?
The only time you'd be truly comfortable seeing a P/E as depressed as Greenbrier Companies' is when the company's growth is on track to lag the market decidedly.
Retrospectively, the last year delivered an exceptional 84% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 306% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Looking ahead now, EPS is anticipated to slump, contracting by 27% during the coming year according to the two analysts following the company. Meanwhile, the broader market is forecast to expand by 13%, which paints a poor picture.
With this information, we are not surprised that Greenbrier Companies is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.
The Bottom Line On Greenbrier Companies' P/E
Shares in Greenbrier Companies are going to need a lot more upward momentum to get the company's P/E out of its slump. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
We've established that Greenbrier Companies maintains its low P/E on the weakness of its forecast for sliding earnings, 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. It's hard to see the share price rising strongly in the near future under these circumstances.
You should always think about risks. Case in point, we've spotted 2 warning signs for Greenbrier Companies you should be aware of, and 1 of them shouldn't be ignored.
Of course, you might also be able to find a better stock than Greenbrier Companies. 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.