When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 19x, you may consider The Michaels Companies, Inc. (NASDAQ:MIK) as an attractive investment with its 11.2x P/E ratio. 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, Michaels Companies has been very sluggish. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. You'd much rather the company wasn't bleeding earnings if you still believe in the business. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.
Want the full picture on analyst estimates for the company? Then our free report on Michaels Companies will help you uncover what's on the horizon.
Does Growth Match The Low P/E?
In order to justify its P/E ratio, Michaels Companies would need to produce sluggish growth that's trailing 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 54%. This means it has also seen a slide in earnings over the longer-term as EPS is down 51% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Turning to the outlook, the next three years should generate growth of 39% each year as estimated by the nine analysts watching the company. That's shaping up to be materially higher than the 13% per annum growth forecast for the broader market.
In light of this, it's peculiar that Michaels Companies' 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 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.
Our examination of Michaels Companies' analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.
You always need to take note of risks, for example - Michaels Companies has 4 warning signs we think you should be aware of.
You might be able to find a better investment than Michaels Companies. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).
This article by Simply Wall St is general in nature. 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.
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