Transcontinental Realty Investors, Inc.'s (NYSE:TCI) Share Price Could Signal Some Risk
When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 19x, you may consider Transcontinental Realty Investors, Inc. (NYSE:TCI) as a stock to avoid entirely with its 76.8x 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.
With earnings growth that's exceedingly strong of late, Transcontinental Realty Investors has been doing very well. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
See our latest analysis for Transcontinental Realty Investors
Is There Enough Growth For Transcontinental Realty Investors?
Transcontinental Realty Investors' P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.
Retrospectively, the last year delivered an exceptional 76% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 99% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
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 find it concerning that Transcontinental Realty Investors is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.
What We Can Learn From Transcontinental Realty Investors' 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 Transcontinental Realty Investors currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.
And what about other risks? Every company has them, and we've spotted 2 warning signs for Transcontinental Realty Investors (of which 1 shouldn't be ignored!) you should know about.
Of course, you might also be able to find a better stock than Transcontinental Realty Investors. 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.