Stock Analysis

Deutsche Wohnen SE's (ETR:DWNI) Low P/E No Reason For Excitement

XTRA:DWNI
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With a price-to-earnings (or "P/E") ratio of 9.3x Deutsche Wohnen SE (ETR:DWNI) may be sending very bullish signals at the moment, given that almost half of all companies in Germany have P/E ratios greater than 22x and even P/E's higher than 37x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

With earnings that are retreating more than the market's of late, Deutsche Wohnen has been very sluggish. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

Check out our latest analysis for Deutsche Wohnen

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XTRA:DWNI Price Based on Past Earnings July 13th 2020
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Deutsche Wohnen.

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

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

Retrospectively, the last year delivered a frustrating 16% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 2.2% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the ten analysts covering the company suggest earnings growth is heading into negative territory, declining 2.2% per annum over the next three years. Meanwhile, the broader market is forecast to expand by 12% per annum, which paints a poor picture.

In light of this, it's understandable that Deutsche Wohnen's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

What We Can Learn From Deutsche Wohnen's P/E?

The price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Deutsche Wohnen's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Plus, you should also learn about these 4 warning signs we've spotted with Deutsche Wohnen (including 1 which doesn't sit too well with us).

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).

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