There Is A Reason Pirelli & C. S.p.A.'s (BIT:PIRC) Price Is Undemanding

Pirelli & C. S.p.A.'s (BIT:PIRC) price-to-earnings (or "P/E") ratio of 12x might make it look like a buy right now compared to the market in Italy, where around half of the companies have P/E ratios above 17x and even P/E's above 29x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

Recent times have been advantageous for Pirelli & C as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Pirelli & C

Want the full picture on analyst estimates for the company? Then our free report on Pirelli & C will help you uncover what's on the horizon.

How Is Pirelli & C's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Pirelli & C's is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered a decent 6.9% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 33% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 10% per year during the coming three years according to the analysts following the company. With the market predicted to deliver 20% growth per annum, the company is positioned for a weaker earnings result.

In light of this, it's understandable that Pirelli & C's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

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.

We've established that Pirelli & C maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Pirelli & C, and understanding should be part of your investment process.

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

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.