The Realogy Holdings Corp. (NYSE:RLGY) share price has fared very poorly over the last month, falling by a substantial 31%. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 37% in that time.
Since its price has dipped substantially, Realogy Holdings may be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 3.9x, since almost half of all companies in the United States have P/E ratios greater than 17x and even P/E's higher than 34x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
Realogy Holdings certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
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How Is Realogy Holdings' Growth Trending?
There's an inherent assumption that a company should far underperform the market for P/E ratios like Realogy Holdings' to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 144% last year. The strong recent performance means it was also able to grow EPS by 170% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 0.6% each year as estimated by the three analysts watching the company. Meanwhile, the broader market is forecast to expand by 12% each year, which paints a poor picture.
In light of this, it's understandable that Realogy Holdings' P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.
The Key Takeaway
Shares in Realogy Holdings have plummeted and its P/E is now low enough to touch the ground. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.