It’s not a stretch to say that PICC Property and Casualty Company Limited’s (HKG:2328) price-to-earnings (or “P/E”) ratio of 7.2x right now seems quite “middle-of-the-road” compared to the market in Hong Kong, where the median P/E ratio is around 9x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
Recent times have been pleasing for PICC Property and Casualty as its earnings have risen in spite of the market’s earnings going into reverse. One possibility is that the P/E is moderate because investors think the company’s earnings will be less resilient 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 not quite in favour.
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What Are Growth Metrics Telling Us About The P/E?
The only time you’d be comfortable seeing a P/E like PICC Property and Casualty’s is when the company’s growth is tracking the market closely.
Retrospectively, the last year delivered a decent 11% gain to the company’s bottom line. This was backed up an excellent period prior to see EPS up by 34% in total over the last three years. Therefore, it’s fair to say the earnings growth recently has been superb for the company.
Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 12% per year over the next three years. That’s shaping up to be materially lower than the 15% each year growth forecast for the broader market.
In light of this, it’s curious that PICC Property and Casualty’s P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.
The Key Takeaway
While the price-to-earnings ratio shouldn’t be the defining factor in whether you buy a stock or not, it’s quite a capable barometer of earnings expectations.
Our examination of PICC Property and Casualty’s analyst forecasts revealed that its inferior earnings outlook isn’t impacting its P/E as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it’s challenging to accept these prices as being reasonable.
You should always think about risks. Case in point, we’ve spotted 1 warning sign for PICC Property and Casualty you should be aware of.
If you’re unsure about the strength of PICC Property and Casualty’s business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
Valuation is complex, but we’re helping make it simple.
Find out whether PICC Property and Casualty is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.
