Unfortunately for some shareholders, the The ODP Corporation (NASDAQ:ODP) share price has dived 27% in the last thirty days, prolonging recent pain. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 76% loss during that time.
In spite of the heavy fall in price, given about half the companies in the United States have price-to-earnings ratios (or "P/E's") above 16x, you may still consider ODP as a highly attractive investment with its 3.4x 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 so limited.
ODP could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.
Check out our latest analysis for ODP
Does Growth Match The Low P/E?
There's an inherent assumption that a company should far underperform the market for P/E ratios like ODP's to be considered reasonable.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 51%. 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.
Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 9.0% per annum as estimated by the three analysts watching the company. Meanwhile, the broader market is forecast to expand by 11% per annum, which paints a poor picture.
With this information, we are not surprised that ODP 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. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.
The Final Word
Shares in ODP have plummeted and its P/E is now low enough to touch the ground. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
As we suspected, our examination of ODP'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.
Before you settle on your opinion, we've discovered 4 warning signs for ODP (1 is significant!) that you should be aware of.
You might be able to find a better investment than ODP. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.