LGI Homes, Inc. (NASDAQ:LGIH) shareholders are no doubt pleased to see that the share price has bounced 27% in the last month, although it is still struggling to make up recently lost ground. But the last month did very little to improve the 52% share price decline over the last year.
Even after such a large jump in price, given about half the companies in the United States have price-to-earnings ratios (or "P/E's") above 19x, you may still consider LGI Homes as an attractive investment with its 11.3x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
LGI Homes could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.
See our latest analysis for LGI Homes
Is There Any Growth For LGI Homes?
The only time you'd be truly comfortable seeing a P/E as low as LGI Homes' is when the company's growth is on track to lag the market.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 46%. This means it has also seen a slide in earnings over the longer-term as EPS is down 73% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Shifting to the future, estimates from the five analysts covering the company suggest earnings growth is heading into negative territory, declining 11% over the next year. Meanwhile, the broader market is forecast to expand by 16%, which paints a poor picture.
In light of this, it's understandable that LGI Homes' P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.
The Bottom Line On LGI Homes' P/E
LGI Homes' stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
We've established that LGI Homes 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
You need to take note of risks, for example - LGI Homes has 2 warning signs (and 1 which is a bit concerning) we think you should know about.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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.