Insurance Australia Group Limited's (ASX:IAG) Shareholders Might Be Looking For Exit

It's not a stretch to say that Insurance Australia Group Limited's (ASX:IAG) price-to-earnings (or "P/E") ratio of 20.4x right now seems quite "middle-of-the-road" compared to the market in Australia, where the median P/E ratio is around 20x. 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.

Recent times have been advantageous for Insurance Australia Group as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

View our latest analysis for Insurance Australia Group

Want the full picture on analyst estimates for the company? Then our free report on Insurance Australia Group will help you uncover what's on the horizon.

Is There Some Growth For Insurance Australia Group?

The only time you'd be comfortable seeing a P/E like Insurance Australia Group's is when the company's growth is tracking the market closely.

If we review the last year of earnings growth, the company posted a worthy increase of 11%. However, due to its less than impressive performance prior to this period, EPS growth is practically non-existent over the last three years overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, EPS is anticipated to climb by 4.8% each year during the coming three years according to the eleven analysts following the company. Meanwhile, the rest of the market is forecast to expand by 18% per annum, which is noticeably more attractive.

With this information, we find it interesting that Insurance Australia Group is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Bottom Line On Insurance Australia Group's P/E

We'd say 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 Insurance Australia Group's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You always need to take note of risks, for example - Insurance Australia Group has 1 warning sign we think 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 low P/E).

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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.