It's not a stretch to say that Flughafen Zürich AG's (VTX:FHZN) price-to-earnings (or "P/E") ratio of 21.6x right now seems quite "middle-of-the-road" compared to the market in Switzerland, where the median P/E ratio is around 21x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
Recent times have been advantageous for Flughafen Zürich as its earnings have been rising faster than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. 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 not quite in favour.
View our latest analysis for Flughafen Zürich
How Is Flughafen Zürich's Growth Trending?
There's an inherent assumption that a company should be matching the market for P/E ratios like Flughafen Zürich's to be considered reasonable.
If we review the last year of earnings growth, the company posted a worthy increase of 9.7%. Although, the latest three year period in total hasn't been as good as it didn't manage to provide any growth at all. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.
Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 5.5% per year over the next three years. Meanwhile, the rest of the market is forecast to expand by 12% per year, which is noticeably more attractive.
In light of this, it's curious that Flughafen Zürich's P/E sits in line with the majority of other companies. 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 Final Word
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
We've established that Flughafen Zürich 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. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
It is also worth noting that we have found 1 warning sign for Flughafen Zürich that you need to take into consideration.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.
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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.
About SWX:FHZN
Excellent balance sheet second-rate dividend payer.
