When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 19x, you may consider Churchill Downs Incorporated (NASDAQ:CHDN) as an attractive investment with its 16.5x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Churchill Downs' earnings growth of late has been pretty similar to most other companies. It might be that many expect the mediocre earnings performance to degrade, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could pick up some stock while it's out of favour.
See our latest analysis for Churchill Downs
How Is Churchill Downs' Growth Trending?
The only time you'd be truly comfortable seeing a P/E as low as Churchill Downs' is when the company's growth is on track to lag the market.
If we review the last year of earnings growth, the company posted a worthy increase of 7.2%. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 3.4% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 7.3% each year during the coming three years according to the ten analysts following the company. That's shaping up to be materially lower than the 11% per annum growth forecast for the broader market.
With this information, we can see why Churchill Downs is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.
The Key Takeaway
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.
As we suspected, our examination of Churchill Downs' 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.
Plus, you should also learn about this 1 warning sign we've spotted with Churchill Downs.
You might be able to find a better investment than Churchill Downs. 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.