Palfinger AG (VIE:PAL) Could Be Riskier Than It Looks

There wouldn't be many who think Palfinger AG's (VIE:PAL) price-to-earnings (or "P/E") ratio of 13x is worth a mention when the median P/E in Austria is similar at about 13x. 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.

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Recent times haven't been advantageous for Palfinger as its earnings have been falling quicker than most other companies. One possibility is that the P/E is moderate because investors think the company's earnings trend will eventually fall in line with most others in the market. You'd much rather the company wasn't bleeding earnings if you still believe in the business. If not, then existing shareholders may be a little nervous about the viability of the share price.

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Is There Some Growth For Palfinger?

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

Retrospectively, the last year delivered a frustrating 22% decrease to the company's bottom line. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 25% in total. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Turning to the outlook, the next three years should generate growth of 15% each year as estimated by the five analysts watching the company. With the market only predicted to deliver 8.1% per annum, the company is positioned for a stronger earnings result.

With this information, we find it interesting that Palfinger is trading at a fairly similar P/E to the market. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

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 Palfinger currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

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

Of course, you might also be able to find a better stock than Palfinger. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.