Investors Continue Waiting On Sidelines For Continental Aktiengesellschaft (ETR:CON)

With a price-to-earnings (or "P/E") ratio of 13.1x Continental Aktiengesellschaft (ETR:CON) may be sending bullish signals at the moment, given that almost half of all companies in Germany have P/E ratios greater than 17x and even P/E's higher than 29x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Continental could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If you still 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 Continental

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

In order to justify its P/E ratio, Continental would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a frustrating 15% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 24% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 34% per annum as estimated by the analysts watching the company. That's shaping up to be materially higher than the 16% per year growth forecast for the broader market.

With this information, we find it odd that Continental is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Key Takeaway

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Continental currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

Having said that, be aware Continental is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of Continental'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.