Improved Earnings Required Before 1&1 AG (ETR:1U1) Shares Find Their Feet

1&1 AG's (ETR:1U1) price-to-earnings (or "P/E") ratio of 7.3x might make it look like a strong buy right now compared to the market in Germany, where around half of the companies have P/E ratios above 18x and even P/E's above 31x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

1&1 hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

See our latest analysis for 1&1

If you'd like to see what analysts are forecasting going forward, you should check out our free report on 1&1.

Does Growth Match The Low P/E?

1&1's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 16%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 24% in total. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Turning to the outlook, the next three years should generate growth of 2.1% each year as estimated by the twelve analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 14% each year, which is noticeably more attractive.

With this information, we can see why 1&1 is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Bottom Line On 1&1's P/E

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 1&1 maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

And what about other risks? Every company has them, and we've spotted 1 warning sign for 1&1 you should know about.

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 low P/E).

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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.