Grupo Mateus S.A.'s (BVMF:GMAT3) Price Is Out Of Tune With Earnings

When close to half the companies in Brazil have price-to-earnings ratios (or "P/E's") below 15x, you may consider Grupo Mateus S.A. (BVMF:GMAT3) as a stock to avoid entirely with its 23.7x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Grupo Mateus hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Grupo Mateus

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

Grupo Mateus' 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.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 7.1%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 91% 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.

Turning to the outlook, the next three years should generate growth of 24% per annum as estimated by the six analysts watching the company. With the market predicted to deliver 22% growth per annum, the company is positioned for a comparable earnings result.

In light of this, it's curious that Grupo Mateus' P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Grupo Mateus' 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.

Our examination of Grupo Mateus' analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Grupo Mateus (1 is a bit unpleasant) you should be aware of.

Of course, you might also be able to find a better stock than Grupo Mateus. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.

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