Porto Seguro S.A.'s (BVMF:PSSA3) Share Price Not Quite Adding Up

There wouldn't be many who think Porto Seguro S.A.'s (BVMF:PSSA3) price-to-earnings (or "P/E") ratio of 8.9x is worth a mention when the median P/E in Brazil is similar at about 10x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Porto Seguro 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 moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

View our latest analysis for Porto Seguro

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

How Is Porto Seguro's Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like Porto Seguro's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 98% last year. The strong recent performance means it was also able to grow EPS by 36% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 5.8% per annum as estimated by the seven analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 16% each year, which is noticeably more attractive.

With this information, we find it interesting that Porto Seguro is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

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.

Our examination of Porto Seguro's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It is also worth noting that we have found 2 warning signs for Porto Seguro that you need to take into consideration.

If these risks are making you reconsider your opinion on Porto Seguro, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.