There's Reason For Concern Over Ferretti S.p.A.'s (HKG:9638) Price
Ferretti S.p.A.'s (HKG:9638) price-to-earnings (or "P/E") ratio of 21.9x might make it look like a strong sell right now compared to the market in Hong Kong, where around half of the companies have P/E ratios below 9x and even P/E's below 5x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.
Ferretti certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.
Check out our latest analysis for Ferretti
Want the full picture on analyst estimates for the company? Then our free report on Ferretti will help you uncover what's on the horizon.What Are Growth Metrics Telling Us About The High P/E?
The only time you'd be truly comfortable seeing a P/E as steep as Ferretti's is when the company's growth is on track to outshine the market decidedly.
If we review the last year of earnings growth, the company posted a terrific increase of 71%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 35% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 10% each year over the next three years. Meanwhile, the rest of the market is forecast to expand by 15% per year, which is noticeably more attractive.
With this information, we find it concerning that Ferretti is trading at a P/E higher than the market. 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. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.
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 Ferretti'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. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Ferretti that you should be aware of.
If you're unsure about the strength of Ferretti's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
New: AI Stock Screener & Alerts
Our new AI Stock Screener scans the market every day to uncover opportunities.
• Dividend Powerhouses (3%+ Yield)
• Undervalued Small Caps with Insider Buying
• High growth Tech and AI Companies
Or build your own from over 50 metrics.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
About SEHK:9638
Ferretti
Designs, constructs, and sells luxury yachts and pleasure vessels under the Riva, Wally, Ferretti Yachts, Pershing, Itama, CRN, and Custom Line brands globally.
Flawless balance sheet and undervalued.