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Wall Street JournalTurning Point Brands, Inc. (NYSE:TPB) Stocks Shoot Up 47% But Its P/E Still Looks Reasonable
Turning Point Brands, Inc. (NYSE:TPB) shares have had a really impressive month, gaining 47% after a shaky period beforehand. The annual gain comes to 144% following the latest surge, making investors sit up and take notice.
After such a large jump in price, Turning Point Brands' price-to-earnings (or "P/E") ratio of 28.9x might make it look like a strong sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 17x and even P/E's below 10x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
Recent times have been advantageous for Turning Point Brands as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
See our latest analysis for Turning Point Brands
How Is Turning Point Brands' Growth Trending?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Turning Point Brands' to be considered reasonable.
If we review the last year of earnings growth, the company posted a worthy increase of 15%. However, due to its less than impressive performance prior to this period, EPS growth is practically non-existent over the last three years overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
Looking ahead now, EPS is anticipated to climb by 17% during the coming year according to the four analysts following the company. That's shaping up to be materially higher than the 13% growth forecast for the broader market.
In light of this, it's understandable that Turning Point Brands' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Final Word
Turning Point Brands' P/E is flying high just like its stock has during the last month. 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.
We've established that Turning Point Brands maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Turning Point Brands, and understanding should be part of your investment process.
If you're unsure about the strength of Turning Point Brands' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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.