Royal Unibrew A/S' (CPH:RBREW) Share Price Not Quite Adding Up

With a price-to-earnings (or "P/E") ratio of 29.3x Royal Unibrew A/S (CPH:RBREW) may be sending very bearish signals at the moment, given that almost half of all companies in Denmark have P/E ratios under 15x and even P/E's lower than 8x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Royal Unibrew certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as Royal Unibrew's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a decent 2.8% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 44% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 7.7% per annum over the next three years. Meanwhile, the rest of the market is forecast to expand by 19% each year, which is noticeably more attractive.

In light of this, it's alarming that Royal Unibrew's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Royal Unibrew'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.

Our examination of Royal Unibrew's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near 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 high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It is also worth noting that we have found 2 warning signs for Royal Unibrew that you need to take into consideration.

If these risks are making you reconsider your opinion on Royal Unibrew, explore our interactive list of high quality stocks to get an idea of what else is out there.

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