Optimistic Investors Push Meidensha Corporation (TSE:6508) Shares Up 27% But Growth Is Lacking

Meidensha Corporation (TSE:6508) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 89% in the last year.

Although its price has surged higher, there still wouldn't be many who think Meidensha's price-to-earnings (or "P/E") ratio of 12.3x is worth a mention when the median P/E in Japan is similar at about 13x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Meidensha certainly has been doing a good job lately as it's been growing earnings more 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 you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

See our latest analysis for Meidensha

Keen to find out how analysts think Meidensha's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Meidensha's Growth Trending?

The only time you'd be comfortable seeing a P/E like Meidensha's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered an exceptional 90% gain to the company's bottom line. Pleasingly, EPS has also lifted 78% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 1.5% per annum as estimated by the five analysts watching the company. That's shaping up to be materially lower than the 9.6% each year growth forecast for the broader market.

With this information, we find it interesting that Meidensha 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 Key Takeaway

Meidensha's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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.

We've established that Meidensha currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Meidensha that you should be aware of.

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

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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.