The Price Is Right For AstraZeneca PLC (LON:AZN)
AstraZeneca PLC's (LON:AZN) price-to-earnings (or "P/E") ratio of 67.7x might make it look like a strong sell right now compared to the market in the United Kingdom, where around half of the companies have P/E ratios below 15x and even P/E's below 9x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
With earnings that are retreating more than the market's of late, AstraZeneca has been very sluggish. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
See our latest analysis for AstraZeneca
Want the full picture on analyst estimates for the company? Then our free report on AstraZeneca will help you uncover what's on the horizon.
What Are Growth Metrics Telling Us About The High P/E?
The only time you'd be truly comfortable seeing a P/E as steep as AstraZeneca's is when the company's growth is on track to outshine the market decidedly.
Retrospectively, the last year delivered a frustrating 4.3% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 46% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Turning to the outlook, the next three years should generate growth of 51% each year as estimated by the analysts watching the company. That's shaping up to be materially higher than the 12% per year growth forecast for the broader market.
In light of this, it's understandable that AstraZeneca's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
What We Can Learn From AstraZeneca's P/E?
The price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
As we suspected, our examination of AstraZeneca's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with AstraZeneca (at least 1 which is concerning), and understanding them should be part of your investment process.
You might be able to find a better investment than AstraZeneca. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).
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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