When close to half the companies in the United States have price-to-earnings ratios (or “P/E’s”) above 19x, you may consider Servotronics, Inc. (NYSEMKT:SVT) as a highly attractive investment with its 4.8x P/E ratio. Nonetheless, we’d need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.
Servotronics has been doing a good job lately as it’s been growing earnings at a solid pace. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. 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.free report on Servotronics’ earnings, revenue and cash flow.
Does Growth Match The Low P/E?
In order to justify its P/E ratio, Servotronics would need to produce anemic growth that’s substantially trailing the market.
If we review the last year of earnings growth, the company posted a terrific increase of 25%. The strong recent performance means it was also able to grow EPS by 538% 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.
Comparing that to the market, which is only predicted to deliver 5.2% growth in the next 12 months, the company’s momentum is stronger based on recent medium-term annualised earnings results.
With this information, we find it odd that Servotronics is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.
The Final Word
The price-to-earnings ratio’s power isn’t primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
Our examination of Servotronics revealed its three-year earnings trends aren’t contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.
There are also other vital risk factors to consider before investing and we’ve discovered 2 warning signs for Servotronics that you should be aware of.
It’s important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio 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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