What HOCHTIEF Aktiengesellschaft's (ETR:HOT) 27% Share Price Gain Is Not Telling You

Despite an already strong run, HOCHTIEF Aktiengesellschaft (ETR:HOT) shares have been powering on, with a gain of 27% in the last thirty days. The annual gain comes to 111% following the latest surge, making investors sit up and take notice.

Even after such a large jump in price, it's still not a stretch to say that HOCHTIEF's price-to-earnings (or "P/E") ratio of 20.4x right now seems quite "middle-of-the-road" compared to the market in Germany, where the median P/E ratio is around 19x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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With earnings growth that's superior to most other companies of late, HOCHTIEF has been doing relatively well. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

View our latest analysis for HOCHTIEF

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

Does Growth Match The P/E?

HOCHTIEF's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

If we review the last year of earnings growth, the company posted a terrific increase of 18%. The latest three year period has also seen an excellent 189% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 4.8% per year as estimated by the seven analysts watching the company. With the market predicted to deliver 17% growth each year, the company is positioned for a weaker earnings result.

In light of this, it's curious that HOCHTIEF'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. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Key Takeaway

HOCHTIEF appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that HOCHTIEF currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 3 warning signs for HOCHTIEF you should be aware of.

You might be able to find a better investment than HOCHTIEF. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.