Wagners Holding Company Limited's (ASX:WGN) 27% Share Price Surge Not Quite Adding Up

Wagners Holding Company Limited (ASX:WGN) shares have continued their recent momentum with a 27% gain in the last month alone. The last month tops off a massive increase of 140% in the last year.

Following the firm bounce in price, Wagners Holding's price-to-earnings (or "P/E") ratio of 28.2x might make it look like a sell right now compared to the market in Australia, where around half of the companies have P/E ratios below 20x and even P/E's below 12x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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Wagners Holding certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Wagners Holding

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Does Growth Match The High P/E?

In order to justify its P/E ratio, Wagners Holding would need to produce impressive growth in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 120%. Pleasingly, EPS has also lifted 179% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the one analyst covering the company suggest earnings should grow by 11% each year over the next three years. That's shaping up to be materially lower than the 17% per year growth forecast for the broader market.

In light of this, it's alarming that Wagners Holding's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Wagners Holding's P/E

The large bounce in Wagners Holding's shares has lifted the company's P/E to a fairly high level. 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 Wagners Holding's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. 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.

Before you settle on your opinion, we've discovered 1 warning sign for Wagners Holding that you should be aware of.

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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.