GMS Inc. (NYSE:GMS) Looks Inexpensive But Perhaps Not Attractive Enough

GMS Inc. +0.86%

GMS Inc.

GMS

102.29

+0.86%

With a price-to-earnings (or "P/E") ratio of 14.5x GMS Inc. (NYSE:GMS) may be sending bullish signals at the moment, given that almost half of all companies in the United States have P/E ratios greater than 19x and even P/E's higher than 35x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Recent times haven't been advantageous for GMS as its earnings have been falling quicker than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. You'd much rather the company wasn't bleeding earnings if you still believe in the business. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

pe-multiple-vs-industry
NYSE:GMS Price to Earnings Ratio vs Industry October 31st 2024
Keen to find out how analysts think GMS' future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as GMS' is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered a frustrating 23% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 93% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 2.3% as estimated by the eight analysts watching the company. With the market predicted to deliver 15% growth , that's a disappointing outcome.

With this information, we are not surprised that GMS 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. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that GMS maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You might be able to find a better investment than GMS.

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