Insufficient Growth At Nestlé S.A. (VTX:NESN) Hampers Share Price

When close to half the companies in Switzerland have price-to-earnings ratios (or "P/E's") above 21x, you may consider Nestlé S.A. (VTX:NESN) as an attractive investment with its 17.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Recent times have been advantageous for Nestlé as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out our latest analysis for Nestlé

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

Is There Any Growth For Nestlé?

There's an inherent assumption that a company should underperform the market for P/E ratios like Nestlé's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 18% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Looking ahead now, EPS is anticipated to climb by 4.8% each year during the coming three years according to the analysts following the company. With the market predicted to deliver 12% growth per year, the company is positioned for a weaker earnings result.

With this information, we can see why Nestlé is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount 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 Nestlé maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Nestlé that you should be aware of.

Of course, you might also be able to find a better stock than Nestlé. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.