IRB-Brasil Resseguros S.A.'s (BVMF:IRBR3) Shares Lagging The Market But So Is The Business

IRB-Brasil Resseguros S.A.'s (BVMF:IRBR3) price-to-earnings (or "P/E") ratio of 4.7x might make it look like a strong buy right now compared to the market in Brazil, where around half of the companies have P/E ratios above 16x and even P/E's above 30x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

IRB-Brasil Resseguros 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 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.

View our latest analysis for IRB-Brasil Resseguros

Want the full picture on analyst estimates for the company? Then our free report on IRB-Brasil Resseguros will help you uncover what's on the horizon.

Does Growth Match The Low P/E?

IRB-Brasil Resseguros' P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Retrospectively, the last year delivered an exceptional 40% gain to the company's bottom line. The latest three year period has also seen an excellent 87% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 22% each year as estimated by the seven analysts watching the company. Meanwhile, the broader market is forecast to expand by 13% per year, which paints a poor picture.

With this information, we are not surprised that IRB-Brasil Resseguros 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 Final Word

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of IRB-Brasil Resseguros' 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.

And what about other risks? Every company has them, and we've spotted 4 warning signs for IRB-Brasil Resseguros (of which 2 are concerning!) you should know about.

Of course, you might also be able to find a better stock than IRB-Brasil Resseguros. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.

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