Iberdrola, S.A.'s (BME:IBE) Shareholders Might Be Looking For Exit

When close to half the companies in Spain have price-to-earnings ratios (or "P/E's") below 16x, you may consider Iberdrola, S.A. (BME:IBE) as a stock to potentially avoid with its 22.2x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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While the market has experienced earnings growth lately, Iberdrola's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

See our latest analysis for Iberdrola

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

What Are Growth Metrics Telling Us About The High P/E?

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

Retrospectively, the last year delivered a frustrating 19% decrease to the company's bottom line. 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 20% in total. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 12% per annum during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to expand by 11% each year, which is not materially different.

With this information, we find it interesting that Iberdrola is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Key Takeaway

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Iberdrola currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You always need to take note of risks, for example - Iberdrola has 2 warning signs we think you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.