When nearly half of companies in the United States have price-to-earnings (or “P/E”) ratios below 19x, you might want to consider Standex international company (NYSE:SXI) as a stock to avoid entirely with its P/E ratio of 41.2x. However, the P/E may be quite high for a reason and it requires further investigation to determine if it is warranted.
Standex International hasn’t tracked well lately, as its declining profits compare poorly to those of other companies, which have seen some growth on average. Many may expect the weak earnings performance to pick up significantly, which has kept the P/E from crashing. If not, existing shareholders could be extremely nervous about the viability of the stock price.
What is the growth trend of Standex International?
The only time you’d be really comfortable seeing a P/E as steep as Standex International’s is when the company’s growth is on track to definitely outpace the market.
If we review the last year of earnings, the company’s earnings fell a disheartening 36%. As a result, revenues from three years ago also fell 8.1% overall. So, unfortunately, we have to recognize that the company hasn’t done a great job of growing earnings over this period.
Looking ahead, EPS is expected to climb 82% in the coming year according to the four analysts who track the company. Meanwhile, the rest of the market is only expected to grow by 17%, which is significantly less attractive.
With this information, we can understand why Standex International is trading at such a high P/E relative to the market. Apparently shareholders don’t want to offload something that potentially looks to a more prosperous future.
The last word
While the price-to-earnings ratio shouldn’t be the determining factor in whether or not you buy a stock, it is a very capable barometer of earnings expectations.
We have established that Standex International maintains its high P/E thanks to its growth forecast above that of the broader market, as expected. At this point, investors believe that the potential for earnings deterioration is not large enough to warrant a lower P/E ratio. Unless these conditions change, they will continue to provide strong support for the stock price.
That said, know Standex International shows 3 warning signs in our investment analysis, you should know.
If you are interested in P/E ratiosyou might want to see this free collection of other companies that have increased earnings sharply and are trading at P/Es below 20x.
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