When close to half the companies in Germany have price-to-earnings ratios (or "P/E's") below 15x, you may consider Infineon Technologies AG (ETR:IFX) as a stock to potentially avoid with its 23.3x P/E ratio. 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, Infineon Technologies' 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 Infineon Technologies
How Is Infineon Technologies' Growth Trending?
In order to justify its P/E ratio, Infineon Technologies would need to produce impressive growth in excess of the market.
Retrospectively, the last year delivered a frustrating 44% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 53% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.
Turning to the outlook, the next three years should generate growth of 20% per year as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 16% each year, which is noticeably less attractive.
With this information, we can see why Infineon Technologies is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Bottom Line On Infineon Technologies' P/E
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.
As we suspected, our examination of Infineon Technologies' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.
Plus, you should also learn about these 2 warning signs we've spotted with Infineon Technologies.
If these risks are making you reconsider your opinion on Infineon Technologies, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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 XTRA:IFX
Infineon Technologies
Engages in the design, development, manufacture, and marketing of semiconductors and semiconductor-based solutions worldwide.
Excellent balance sheet and fair value.
