West Holdings Corporation (TSE:1407) shares have had a horrible month, losing 26% after a relatively good period beforehand. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 33% share price drop.
In spite of the heavy fall in price, given about half the companies in Japan have price-to-earnings ratios (or "P/E's") above 15x, you may still consider West Holdings as an attractive investment with its 10.9x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
While the market has experienced earnings growth lately, West Holdings' 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.
View our latest analysis for West Holdings
How Is West Holdings' Growth Trending?
There's an inherent assumption that a company should underperform the market for P/E ratios like West Holdings' to be considered reasonable.
Retrospectively, the last year delivered a frustrating 19% decrease to the company's bottom line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 29% overall rise in EPS. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.
Turning to the outlook, the next three years should generate growth of 23% per year as estimated by the four analysts watching the company. That's shaping up to be materially higher than the 9.5% each year growth forecast for the broader market.
In light of this, it's peculiar that West Holdings' P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.
The Key Takeaway
The softening of West Holdings' shares means its P/E is now sitting at a pretty low level. 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 West Holdings' analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.
Before you settle on your opinion, we've discovered 3 warning signs for West Holdings (1 can't be ignored!) that you should be aware of.
Of course, you might also be able to find a better stock than West Holdings. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
Valuation is complex, but we're here to simplify it.
Discover if West Holdings might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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.