NYSE:EAT) price-to-earnings (or "P/E") ratio of 9.2x might make it look like a strong buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 19x and even P/E’s above 38x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it’s justified.” data-reactid=”28″>Brinker International, Inc.’s (NYSE:EAT) price-to-earnings (or “P/E”) ratio of 9.2x might make it look like a strong buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 19x and even P/E’s above 38x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it’s justified.
Recent times haven’t been advantageous for Brinker International as its earnings have been falling quicker than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. 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.
Check out our latest analysis for Brinker International ” data-reactid=”30″>Check out our latest analysis for Brinker International
free report is a great place to start.” data-reactid=”47″>Keen to find out how analysts think Brinker International’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 Low P/E?
The only time you’d be truly comfortable seeing a P/E as depressed as Brinker International’s is when the company’s growth is on track to lag the market decidedly.
Retrospectively, the last year delivered a frustrating 16% decrease to the company’s bottom line. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Accordingly, shareholders probably wouldn’t have been overly satisfied with the unstable medium-term growth rates.
Shifting to the future, estimates from the analysts covering the company suggest earnings growth is heading into negative territory, declining 66% over the next year. That’s not great when the rest of the market is expected to grow by 3.2%.
With this information, we are not surprised that Brinker International is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.
The Key Takeaway
The price-to-earnings ratio’s power isn’t primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
As we suspected, our examination of Brinker International’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. It’s hard to see the share price rising strongly in the near future under these circumstances.
5 warning signs with Brinker International, and understanding these should be part of your investment process.” data-reactid=”56″>It’s always necessary to consider the ever-present spectre of investment risk. We’ve identified 5 warning signs with Brinker International, and understanding these should be part of your investment process.
collection of other companies that have grown earnings strongly and trade on P/E’s below 20x.” data-reactid=”57″>If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E’s below 20x.
Get in touch with us directly. Alternatively, email [email protected].” data-reactid=”58″>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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