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Tourism Holdings Limited (NZSE:THL) Held Back By Insufficient Growth Even After Shares Climb 37%

Tourism Holdings Limited (NZSE:THL) shareholders would be excited to see that the share price has had a great month, posting a 37% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 44% over that time.

In spite of the firm bounce in price, Tourism Holdings may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 12.8x, since almost half of all companies in New Zealand have P/E ratios greater than 23x and even P/E's higher than 38x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Tourism Holdings has been struggling lately as its earnings have declined faster than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Check out our latest analysis for Tourism Holdings

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Want the full picture on analyst estimates for the company? Then our free report on Tourism Holdings will help you uncover what's on the horizon.

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Tourism Holdings would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a frustrating 60% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 28% 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 bring diminished returns, with earnings decreasing 7.1% each year as estimated by the three analysts watching the company. Meanwhile, the broader market is forecast to expand by 11% each year, which paints a poor picture.

With this information, we are not surprised that Tourism Holdings 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 Final Word

Despite Tourism Holdings' shares building up a head of steam, its P/E still lags most other companies. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Tourism Holdings' analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You should always think about risks. Case in point, we've spotted 3 warning signs for Tourism Holdings you should be aware of, and 1 of them doesn't sit too well with us.

If these risks are making you reconsider your opinion on Tourism Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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