Metso Oyj (HEL:METSO) Might Not Be As Mispriced As It Looks After Plunging 27%

Metso Oyj (HEL:METSO) shareholders won't be pleased to see that the share price has had a very rough month, dropping 27% and undoing the prior period's positive performance. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 30% in that time.

In spite of the heavy fall in price, Metso Oyj may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 13.6x, since almost half of all companies in Finland have P/E ratios greater than 19x and even P/E's higher than 29x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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Recent times haven't been advantageous for Metso Oyj as its earnings have been falling quicker than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

See our latest analysis for Metso Oyj

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Does Growth Match The Low P/E?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 9.4%. Still, the latest three year period has seen an excellent 65% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Looking ahead now, EPS is anticipated to climb by 13% per annum during the coming three years according to the analysts following the company. That's shaping up to be similar to the 13% each year growth forecast for the broader market.

With this information, we find it odd that Metso Oyj is trading at a P/E lower than the market. It may be that most investors are not convinced the company can achieve future growth expectations.

The Final Word

The softening of Metso Oyj's shares means its P/E is now sitting at a pretty low level. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Metso Oyj currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.

Before you settle on your opinion, we've discovered 3 warning signs for Metso Oyj that you should be aware of.

You might be able to find a better investment than Metso Oyj. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.