Wynn Macau, Limited (HKG:1128) shares have continued their recent momentum with a 29% gain in the last month alone. Notwithstanding the latest gain, the annual share price return of 9.6% isn't as impressive.
In spite of the firm bounce in price, it's still not a stretch to say that Wynn Macau's price-to-earnings (or "P/E") ratio of 11x right now seems quite "middle-of-the-road" compared to the market in Hong Kong, where the median P/E ratio is around 11x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.
Recent times have been advantageous for Wynn Macau as its earnings have been rising faster than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.
See our latest analysis for Wynn Macau
Does Growth Match The P/E?
The only time you'd be comfortable seeing a P/E like Wynn Macau's is when the company's growth is tracking the market closely.
Retrospectively, the last year delivered an exceptional 173% gain to the company's bottom line. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.
Turning to the outlook, the next three years should generate growth of 1.2% per year as estimated by the analysts watching the company. That's shaping up to be materially lower than the 14% each year growth forecast for the broader market.
With this information, we find it interesting that Wynn Macau is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.
The Final Word
Wynn Macau appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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.
Our examination of Wynn Macau's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
Before you take the next step, you should know about the 4 warning signs for Wynn Macau (2 are potentially serious!) that we have uncovered.
If you're unsure about the strength of Wynn Macau'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. 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.