Those holding H. Lundbeck A/S (CPH:HLUN B) shares would be relieved that the share price has rebounded 25% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.
In spite of the firm bounce in price, given about half the companies in Denmark have price-to-earnings ratios (or "P/E's") above 16x, you may still consider H. Lundbeck as an attractive investment with its 11.2x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Recent times have been advantageous for H. Lundbeck as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
View our latest analysis for H. Lundbeck
What Are Growth Metrics Telling Us About The Low P/E?
There's an inherent assumption that a company should underperform the market for P/E ratios like H. Lundbeck's to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 36%. The strong recent performance means it was also able to grow EPS by 197% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Looking ahead now, EPS is anticipated to climb by 9.5% per year during the coming three years according to the ten analysts following the company. Meanwhile, the rest of the market is forecast to expand by 14% per annum, which is noticeably more attractive.
In light of this, it's understandable that H. Lundbeck's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.
The Final Word
The latest share price surge wasn't enough to lift H. Lundbeck's P/E close to the market median. 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.
As we suspected, our examination of H. Lundbeck's analyst forecasts revealed that its inferior earnings outlook 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. 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 H. Lundbeck you should know about.
If these risks are making you reconsider your opinion on H. Lundbeck, explore our interactive list of high quality stocks to get an idea of what else is out there.
Valuation is complex, but we're here to simplify it.
Discover if H. Lundbeck might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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.