James Hardie Industries plc's (ASX:JHX) Share Price Matching Investor Opinion

When close to half the companies in Australia have price-to-earnings ratios (or "P/E's") below 18x, you may consider James Hardie Industries plc (ASX:JHX) as a stock to avoid entirely with its 32.2x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Recent times haven't been advantageous for James Hardie Industries as its earnings have been falling quicker than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.

See our latest analysis for James Hardie Industries

Want the full picture on analyst estimates for the company? Then our free report on James Hardie Industries will help you uncover what's on the horizon.

What Are Growth Metrics Telling Us About The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like James Hardie Industries' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 4.7% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 237% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Looking ahead now, EPS is anticipated to climb by 19% each year during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 17% per annum, which is noticeably less attractive.

In light of this, it's understandable that James Hardie Industries' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

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.

We've established that James Hardie Industries 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. Unless these conditions change, they will continue to provide strong support to the share price.

Plus, you should also learn about this 1 warning sign we've spotted with James Hardie Industries.

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.