Risks To Shareholder Returns Are Elevated At These Prices For 1&1 AG (ETR:1U1)

There wouldn't be many who think 1&1 AG's (ETR:1U1) price-to-earnings (or "P/E") ratio of 18.5x is worth a mention when the median P/E in Germany is similar at about 19x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

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1&1 could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is moderate because investors think this poor earnings performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

View 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.

How Is 1&1's Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like 1&1's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 42% 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 50% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 13% per annum during the coming three years according to the nine analysts following the company. Meanwhile, the rest of the market is forecast to expand by 17% per annum, which is noticeably more attractive.

With this information, we find it interesting that 1&1 is trading at a fairly similar P/E to the market. 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 Final Word

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.

Our examination of 1&1's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you take the next step, you should know about the 2 warning signs for 1&1 that we have uncovered.

If these risks are making you reconsider your opinion on 1&1, 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.