Unpleasant Surprises Could Be In Store For ABB Ltd's (VTX:ABBN) Shares

When close to half the companies in Switzerland have price-to-earnings ratios (or "P/E's") below 19x, you may consider ABB Ltd (VTX:ABBN) as a stock to potentially avoid with its 23.2x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

We've discovered 1 warning sign about ABB. View them for free.

With earnings growth that's superior to most other companies of late, ABB has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for ABB

Keen to find out how analysts think ABB's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For ABB?

The only time you'd be truly comfortable seeing a P/E as high as ABB's is when the company's growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a worthy increase of 14%. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 5.0% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 8.8% per year during the coming three years according to the analysts following the company. That's shaping up to be similar to the 10% per annum growth forecast for the broader market.

With this information, we find it interesting that ABB is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Bottom Line On ABB's P/E

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.

Our examination of ABB's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 1 warning sign for ABB that we have uncovered.

If you're unsure about the strength of ABB's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.