FNM S.p.A. (BIT:FNM) Surges 25% Yet Its Low P/E Is No Reason For Excitement

FNM S.p.A. (BIT:FNM) shareholders have had their patience rewarded with a 25% share price jump in the last month. Looking further back, the 18% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Even after such a large jump in price, FNM may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 3.2x, since almost half of all companies in Italy have P/E ratios greater than 18x and even P/E's higher than 30x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

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While the market has experienced earnings growth lately, FNM's earnings have gone into reverse gear, which is not great. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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Does Growth Match The Low P/E?

There's an inherent assumption that a company should far underperform the market for P/E ratios like FNM's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 8.7%. The last three years don't look nice either as the company has shrunk EPS by 5.2% in aggregate. 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 growth is heading into negative territory, declining 21% per annum over the next three years. That's not great when the rest of the market is expected to grow by 20% per year.

In light of this, it's understandable that FNM's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From FNM's P/E?

FNM's recent share price jump still sees its P/E sitting firmly flat on the ground. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that FNM maintains its low P/E on the weakness of its forecast for sliding earnings, 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.

Before you settle on your opinion, we've discovered 3 warning signs for FNM (2 are a bit unpleasant!) that you should be aware of.

If you're unsure about the strength of FNM'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.