The Williams-Sonoma, Inc. (NYSE:WSM) share price has fared very poorly over the last month, falling by a substantial 26%. The recent drop has obliterated the annual return, with the share price now down 9.9% over that longer period.
Although its price has dipped substantially, there still wouldn't be many who think Williams-Sonoma's price-to-earnings (or "P/E") ratio of 15.3x is worth a mention when the median P/E in the United States is similar at about 16x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.
Williams-Sonoma certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.
View our latest analysis for Williams-Sonoma
Is There Some Growth For Williams-Sonoma?
The only time you'd be comfortable seeing a P/E like Williams-Sonoma's is when the company's growth is tracking the market closely.
If we review the last year of earnings growth, the company posted a terrific increase of 20%. As a result, it also grew EPS by 20% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.
Turning to the outlook, the next three years should generate growth of 3.9% per year as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 11% per year, which is noticeably more attractive.
In light of this, it's curious that Williams-Sonoma's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.
What We Can Learn From Williams-Sonoma's P/E?
Following Williams-Sonoma's share price tumble, its P/E is now hanging on to the median market P/E. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
Our examination of Williams-Sonoma's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Williams-Sonoma with six simple checks on some of these key factors.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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.