Earnings Not Telling The Story For BB Seguridade Participações S.A. (BVMF:BBSE3) After Shares Rise 25%

BB Seguridade Participações S.A. (BVMF:BBSE3) shareholders would be excited to see that the share price has had a great month, posting a 25% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 14% over that time.

In spite of the firm bounce in price, it's still not a stretch to say that BB Seguridade Participações' price-to-earnings (or "P/E") ratio of 14.4x right now seems quite "middle-of-the-road" compared to the market in Brazil, where the median P/E ratio is around 15x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

BB Seguridade Participações could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to strengthen positively, which has kept the P/E from falling. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

View our latest analysis for BB Seguridade Participações

If you'd like to see what analysts are forecasting going forward, you should check out our free report on BB Seguridade Participações.

How Is BB Seguridade Participações' Growth Trending?

In order to justify its P/E ratio, BB Seguridade Participações would need to produce growth that's similar to the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 34%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next year should generate growth of 2.4% as estimated by the twelve analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 22%, which is noticeably more attractive.

With this information, we find it interesting that BB Seguridade Participações 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. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On BB Seguridade Participações' P/E

BB Seguridade Participações appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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 BB Seguridade Participações currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. 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. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

You need to take note of risks, for example - BB Seguridade Participações has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

Of course, you might also be able to find a better stock than BB Seguridade Participações. 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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