Why Investors Shouldn't Be Surprised By M/I Homes, Inc.'s (NYSE:MHO) Low P/E

With a price-to-earnings (or "P/E") ratio of 5.7x M/I Homes, Inc. (NYSE:MHO) may be sending very bullish signals at the moment, given that almost half of all companies in the United States have P/E ratios greater than 18x and even P/E's higher than 32x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

Our free stock report includes 2 warning signs investors should be aware of before investing in M/I Homes. Read for free now.

With earnings growth that's superior to most other companies of late, M/I Homes has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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.

Check out our latest analysis for M/I Homes

Keen to find out how analysts think M/I Homes' future stacks up against the industry? In that case, our free report is a great place to start.

How Is M/I Homes' Growth Trending?

There's an inherent assumption that a company should far underperform the market for P/E ratios like M/I Homes' to be considered reasonable.

Retrospectively, the last year delivered a decent 8.4% gain to the company's bottom line. The latest three year period has also seen an excellent 44% overall rise in EPS, aided somewhat by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 12% as estimated by the three analysts watching the company. Meanwhile, the broader market is forecast to expand by 14%, which paints a poor picture.

With this information, we are not surprised that M/I Homes 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 the weak outlook is weighing down the shares.

The Bottom Line On M/I Homes' 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.

As we suspected, our examination of M/I Homes' analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Having said that, be aware M/I Homes is showing 2 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 M/I Homes. 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.