NYSE:BBY) price-to-earnings (or “P/E”) ratio of 20.9x is worth a mention when the median P/E in the United States is similar at about 19x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.” data-reactid=”28″ type=”text”>There wouldn’t be many who think Best Buy Co., Inc.’s (NYSE:BBY) price-to-earnings (or “P/E”) ratio of 20.9x is worth a mention when the median P/E in the United States is similar at about 19x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
The recently shrinking earnings for Best Buy have been in line with the market. It seems that few are expecting the company’s earnings performance to deviate much from most other companies, which has held the P/E back. If you still like the company, you’d want its earnings trajectory to turn around before making any decisions. At the very least, you’d be hoping that earnings don’t accelerate downwards if your plan is to pick up some stock while it’s not in favour.
free report on Best Buy.” data-reactid=”47″ type=”text”>If you’d like to see what analysts are forecasting going forward, you should check out our free report on Best Buy.
How Is Best Buy’s Growth Trending?
There’s an inherent assumption that a company should be matching the market for P/E ratios like Best Buy’s to be considered reasonable.
Retrospectively, the last year delivered a frustrating 2.0% decrease to the company’s bottom line. Still, the latest three year period has seen an excellent 47% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it’s been a bumpy ride, it’s still fair to say the earnings growth recently has been more than adequate for the company.
Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 6.7% per year over the next three years. Meanwhile, the rest of the market is forecast to expand by 14% per year, which is noticeably more attractive.
In light of this, it’s curious that Best Buy’s P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.
The Final Word
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
We’ve established that Best Buy currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren’t likely to support a more positive sentiment for long. This places shareholders’ investments at risk and potential investors in danger of paying an unnecessary premium.
Best Buy has 3 warning signs we think you should be aware of.” data-reactid=”56″ type=”text”>You always need to take note of risks, for example – Best Buy has 3 warning signs we think you should be aware of.
our interactive list of stocks with solid business fundamentals for some other companies you may have missed.” data-reactid=”57″ type=”text”>If you’re unsure about the strength of Best Buy’s business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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.