Market Participants Recognise Steven Madden, Ltd.'s (NASDAQ:SHOO) Earnings Pushing Shares 27% Higher
Despite an already strong run, Steven Madden, Ltd. (NASDAQ:SHOO) shares have been powering on, with a gain of 27% in the last thirty days. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 9.0% over the last year.
Since its price has surged higher, given close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 18x, you may consider Steven Madden as a stock to avoid entirely with its 53.8x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
Steven Madden hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.
View our latest analysis for Steven Madden
Does Growth Match The High P/E?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Steven Madden's to be considered reasonable.
Retrospectively, the last year delivered a frustrating 67% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 76% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Turning to the outlook, the next year should generate growth of 173% as estimated by the nine analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 16%, which is noticeably less attractive.
With this information, we can see why Steven Madden is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Key Takeaway
Shares in Steven Madden have built up some good momentum lately, which has really inflated its P/E. 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 Steven Madden maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.
You always need to take note of risks, for example - Steven Madden has 4 warning signs we think you should be aware of.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).
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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.