Subdued Growth No Barrier To Morgan Sindall Group plc (LON:MGNS) With Shares Advancing 30%

Morgan Sindall Group plc (LON:MGNS) shares have continued their recent momentum with a 30% gain in the last month alone. The annual gain comes to 102% following the latest surge, making investors sit up and take notice.

Although its price has surged higher, it's still not a stretch to say that Morgan Sindall Group's price-to-earnings (or "P/E") ratio of 14.8x right now seems quite "middle-of-the-road" compared to the market in the United Kingdom, where the median P/E ratio is around 16x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Morgan Sindall Group certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

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Is There Some Growth For Morgan Sindall Group?

The only time you'd be comfortable seeing a P/E like Morgan Sindall Group's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered an exceptional 93% gain to the company's bottom line. Pleasingly, EPS has also lifted 62% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 1.0% per year as estimated by the four analysts watching the company. Meanwhile, the broader market is forecast to expand by 13% per annum, which paints a poor picture.

In light of this, it's somewhat alarming that Morgan Sindall Group's P/E sits in line with the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. 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 negative growth outlook.

The Key Takeaway

Its shares have lifted substantially and now Morgan Sindall Group's P/E is also back up to the market median. 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 Morgan Sindall Group's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its P/E as much as we would have predicted. When we see a poor outlook with earnings heading backwards, we suspect share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Morgan Sindall Group you should know about.

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

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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.