There's Reason For Concern Over Airport City Ltd.'s (TLV:ARPT) Price

When close to half the companies in Israel have price-to-earnings ratios (or "P/E's") below 13x, you may consider Airport City Ltd. (TLV:ARPT) as a stock to potentially avoid with its 16.9x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Airport City certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Airport City

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Airport City's earnings, revenue and cash flow.

How Is Airport City's Growth Trending?

In order to justify its P/E ratio, Airport City 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 39%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 55% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 25% shows it's an unpleasant look.

With this information, we find it concerning that Airport City is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Final Word

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Airport City currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware Airport City is showing 2 warning signs in our investment analysis, you should know about.

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

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.