When close to half the companies in the United States have price-to-earnings ratios (or “P/E’s”) below 17x, you may consider Waters Corporation (NYSE:WAT) as a stock to avoid entirely with its 27.7x 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.
Recent times have been pleasing for Waters as its earnings have risen in spite of the market’s earnings going into reverse. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.
See our latest analysis for Waters
What Are Growth Metrics Telling Us About The High P/E?
Waters’ P/E ratio would be typical for a company that’s expected to deliver very strong growth, and importantly, perform much better than the market.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 4.7% last year. EPS has also lifted 24% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it’s fair to say the earnings growth recently has been respectable for the company.
Turning to the outlook, the next three years should generate growth of 6.6% each year as estimated by the analysts watching the company. With the market predicted to deliver 11% growth per annum, the company is positioned for a weaker earnings result.
With this information, we find it concerning that Waters is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren’t willing to let go of their stock at any price. 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 Bottom Line On Waters’ P/E
Typically, we’d caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
We’ve established that Waters 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. Unless these conditions improve markedly, it’s very challenging to accept these prices as being reasonable.
Having said that, be aware Waters is showing 1 warning sign in our investment analysis, you should know about.
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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