Record plc's (LON:REC) Price Is Right But Growth Is Lacking After Shares Rocket 26%
Record plc (LON:REC) shares have had a really impressive month, gaining 26% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 31%.
In spite of the firm bounce in price, Record's price-to-earnings (or "P/E") ratio of 13.1x might still make it look like a buy right now compared to the market in the United Kingdom, where around half of the companies have P/E ratios above 18x and even P/E's above 37x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Record has been doing a reasonable job lately as its earnings haven't declined as much as most other companies. It might be that many expect the comparatively superior earnings performance to degrade substantially, which has repressed the P/E. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. But at the very least, you'd be hoping that earnings don't fall off a cliff completely if your plan is to pick up some stock while it's out of favour.
View our latest analysis for Record
Want the full picture on analyst estimates for the company? Then our free report on Record will help you uncover what's on the horizon.
How Is Record's Growth Trending?
The only time you'd be truly comfortable seeing a P/E as low as Record's is when the company's growth is on track to lag the market.
If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. Fortunately, a few good years before that means that it was still able to grow EPS by 12% in total over the last three years. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.
Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 30% as estimated by the three analysts watching the company. With the market predicted to deliver 4.4% growth , that's a disappointing outcome.
With this information, we are not surprised that Record is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.
The Final Word
The latest share price surge wasn't enough to lift Record's P/E close to the market median. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
As we suspected, our examination of Record's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
Before you take the next step, you should know about the 4 warning signs for Record (1 is a bit unpleasant!) that we have uncovered.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).
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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