Tri Pointe Homes, Inc.'s (NYSE:TPH) price-to-earnings (or "P/E") ratio of 10.3x might make it look like a buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 17x and even P/E's above 32x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
Tri Pointe Homes has been struggling lately as its earnings have declined faster than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. 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.
How Is Tri Pointe Homes' Growth Trending?
There's an inherent assumption that a company should underperform the market for P/E ratios like Tri Pointe Homes' to be considered reasonable.
Retrospectively, the last year delivered a frustrating 38% decrease to the company's bottom line. Even so, admirably EPS has lifted 64% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.
Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 12% each year over the next three years. That's shaping up to be similar to the 10% per annum growth forecast for the broader market.
In light of this, it's peculiar that Tri Pointe Homes' P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.
The Bottom Line On Tri Pointe Homes' P/E
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 Tri Pointe Homes currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.
Before you take the next step, you should know about the 1 warning sign for Tri Pointe Homes that we have uncovered.
If you're unsure about the strength of Tri Pointe Homes' 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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