Lonza Group Ltd’s (VTX:LONN) price-to-earnings (or “P/E”) ratio of 49.1x might make it look like a strong sell right now compared to the market in Switzerland, where around half of the companies have P/E ratios below 20x and even P/E’s below 14x 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 its earnings growth in positive territory compared to the declining earnings of most other companies, Lonza Group has been doing quite well of late. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.free report on Lonza Group.
Does Growth Match The High P/E?
There’s an inherent assumption that a company should far outperform the market for P/E ratios like Lonza Group’s to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 29%. Pleasingly, EPS has also lifted 95% in aggregate from three years ago, thanks to the last 12 months of growth. 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 17% per annum over the next three years. With the market only predicted to deliver 9.0% each year, the company is positioned for a stronger earnings result.
With this information, we can see why Lonza Group is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Key Takeaway
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.
We’ve established that Lonza Group maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren’t under threat. It’s hard to see the share price falling strongly in the near future under these circumstances.
Don’t forget that there may be other risks. For instance, we’ve identified 1 warning sign for Lonza Group that you should be aware of.
If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E’s below 20x.
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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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