Pinning Down Somfy SA's (EPA:SO) P/E Is Difficult Right Now

By
Simply Wall St
Published
August 25, 2020
ENXTPA:SO
Source: Shutterstock

With a price-to-earnings (or "P/E") ratio of 22.1x Somfy SA (EPA:SO) may be sending bearish signals at the moment, given that almost half of all companies in France have P/E ratios under 16x and even P/E's lower than 9x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's lofty.

Somfy 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. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Somfy

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ENXTPA:SO Price Based on Past Earnings August 26th 2020
Want the full picture on analyst estimates for the company? Then our free report on Somfy will help you uncover what's on the horizon.

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 Somfy's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 18% last year. As a result, it also grew EPS by 16% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 4.0% each year during the coming three years according to the four analysts following the company. With the market predicted to deliver 14% growth each year, the company is positioned for a weaker earnings result.

In light of this, it's alarming that Somfy'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. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

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.

Our examination of Somfy'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. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Somfy that you should be aware of.

If you're unsure about the strength of Somfy's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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This article by Simply Wall St is general in nature. 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.
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