When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 19x, you may consider Landstar System, Inc. (NASDAQ:LSTR) as a stock to potentially avoid with its 29.4x 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 lofty.
Landstar System could be doing better as it's been growing earnings less than most other companies lately. One possibility is that the P/E is high because investors think this lacklustre earnings performance will improve markedly. If not, then existing shareholders may be very nervous about the viability of the share price.
Keen to find out how analysts think Landstar System's future stacks up against the industry? In that case, our free report is a great place to start.
How Is Landstar System's Growth Trending?
Landstar System's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.
Retrospectively, the last year delivered a decent 15% gain to the company's bottom line. EPS has also lifted 24% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.
Shifting to the future, estimates from the twelve analysts covering the company suggest earnings should grow by 11% each year over the next three years. With the market predicted to deliver 14% growth per year, the company is positioned for a weaker earnings result.
In light of this, it's alarming that Landstar System's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.
What We Can Learn From Landstar System's P/E?
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.
We've established that Landstar System currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.
We don't want to rain on the parade too much, but we did also find 2 warning signs for Landstar System (1 can't be ignored!) that you need to be mindful of.
If these risks are making you reconsider your opinion on Landstar System, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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