When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 18x, you may consider TopBuild Corp. (NYSE:BLD) as a stock to potentially avoid with its 26.1x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's lofty.
Recent times have been pleasing for TopBuild as its earnings have risen in spite of the market's earnings going into reverse. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Keen to find out how analysts think TopBuild's future stacks up against the industry? In that case, our free report is a great place to start.
What Are Growth Metrics Telling Us About The High P/E?
In order to justify its P/E ratio, TopBuild would need to produce impressive growth in excess of the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 25% last year. The latest three year period has also seen an excellent 242% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 16% each year during the coming three years according to the ten analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 13% per year, which is noticeably less attractive.
With this information, we can see why TopBuild is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
What We Can Learn From TopBuild's P/E?
We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We've established that TopBuild maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.
There are also other vital risk factors to consider before investing and we've discovered 3 warning signs for TopBuild that you should be aware of.
You might be able to find a better investment than TopBuild. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).
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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