Advertisement
New Zealand markets closed
  • NZX 50

    12,105.29
    +94.63 (+0.79%)
     
  • NZD/USD

    0.5973
    -0.0003 (-0.05%)
     
  • NZD/EUR

    0.5537
    +0.0004 (+0.07%)
     
  • ALL ORDS

    8,153.70
    +80.10 (+0.99%)
     
  • ASX 200

    7,896.90
    +77.30 (+0.99%)
     
  • OIL

    83.11
    -0.06 (-0.07%)
     
  • GOLD

    2,254.80
    +16.40 (+0.73%)
     
  • NASDAQ

    18,254.69
    -26.15 (-0.14%)
     
  • FTSE

    7,952.62
    +20.64 (+0.26%)
     
  • Dow Jones

    39,807.37
    +47.29 (+0.12%)
     
  • DAX

    18,492.49
    +15.40 (+0.08%)
     
  • Hang Seng

    16,541.42
    +148.58 (+0.91%)
     
  • NIKKEI 225

    40,301.90
    +133.83 (+0.33%)
     
  • NZD/JPY

    90.3570
    -0.0360 (-0.04%)
     

Unpleasant Surprises Could Be In Store For The Procter & Gamble Company's (NYSE:PG) Shares

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 14x, you may consider The Procter & Gamble Company (NYSE:PG) as a stock to avoid entirely with its 24.8x 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.

Procter & Gamble could be doing better as it's been growing earnings less than most other companies lately. It might be that many expect the uninspiring earnings performance to recover significantly, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

View our latest analysis for Procter & Gamble

pe
pe

Keen to find out how analysts think Procter & Gamble's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Procter & Gamble's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Procter & Gamble's is when the company's growth is on track to outshine the market decidedly.

ADVERTISEMENT

If we review the last year of earnings growth, the company posted a worthy increase of 5.3%. This was backed up an excellent period prior to see EPS up by 275% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 4.4% each year as estimated by the analysts watching the company. That's shaping up to be materially lower than the 9.0% per year growth forecast for the broader market.

In light of this, it's alarming that Procter & Gamble's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Procter & Gamble currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Procter & Gamble you should know about.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a P/E below 20x.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here