Improved Earnings Required Before Standard Motor Products, Inc. (NYSE:SMP) Shares Find Their Feet
Standard Motor Products, Inc.'s (NYSE:SMP) price-to-earnings (or "P/E") ratio of 11.7x might make it look like a buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 18x and even P/E's above 32x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
The earnings growth achieved at Standard Motor Products over the last year would be more than acceptable for most companies. It might be that many expect the respectable earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
See our latest analysis for Standard Motor Products
How Is Standard Motor Products' Growth Trending?
In order to justify its P/E ratio, Standard Motor Products would need to produce sluggish growth that's trailing the market.
Retrospectively, the last year delivered a decent 11% gain to the company's bottom line. Still, lamentably EPS has fallen 19% in aggregate from three years ago, which is disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 16% shows it's an unpleasant look.
With this information, we are not surprised that Standard Motor Products 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 recent earnings trends are already weighing down the shares.
What We Can Learn From Standard Motor Products' 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.
We've established that Standard Motor Products maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.
Having said that, be aware Standard Motor Products is showing 3 warning signs in our investment analysis, and 1 of those is concerning.
Of course, you might also be able to find a better stock than Standard Motor Products. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.