The Weir Group PLC's (LON:WEIR) Popularity With Investors Is Under Threat From Overpricing

When close to half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") below 15x, you may consider The Weir Group PLC (LON:WEIR) as a stock to potentially avoid with its 19.2x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Weir Group 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. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Weir Group

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Is There Enough Growth For Weir Group?

In order to justify its P/E ratio, Weir Group would need to produce impressive growth in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 43%. The latest three year period has also seen an excellent 93% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 14% per year as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 12% each year, which is not materially different.

In light of this, it's curious that Weir Group's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Final Word

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Weir Group 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. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Having said that, be aware Weir Group is showing 1 warning sign in our investment analysis, you should know about.

Of course, you might also be able to find a better stock than Weir Group. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.