Earnings Not Telling The Story For DEUTZ Aktiengesellschaft (ETR:DEZ) After Shares Rise 45%

DEUTZ Aktiengesellschaft (ETR:DEZ) shares have continued their recent momentum with a 45% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 35% in the last year.

Following the firm bounce in price, DEUTZ may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 19.7x, since almost half of all companies in Germany have P/E ratios under 17x and even P/E's lower than 10x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

While the market has experienced earnings growth lately, DEUTZ's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out our latest analysis for DEUTZ

Want the full picture on analyst estimates for the company? Then our free report on DEUTZ will help you uncover what's on the horizon.

How Is DEUTZ's Growth Trending?

In order to justify its P/E ratio, DEUTZ would need to produce impressive growth in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 64%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 106% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Turning to the outlook, the next year should generate growth of 20% as estimated by the five analysts watching the company. That's shaping up to be similar to the 18% growth forecast for the broader market.

With this information, we find it interesting that DEUTZ is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

The large bounce in DEUTZ's shares has lifted the company's P/E to a fairly high level. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of DEUTZ's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Having said that, be aware DEUTZ is showing 3 warning signs in our investment analysis, you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.