ITOCHU Corporation (TSE:8001) Stock's 27% Dive Might Signal An Opportunity But It Requires Some Scrutiny

ITOCHU Corporation (TSE:8001) shares have had a horrible month, losing 27% after a relatively good period beforehand. Indeed, the recent drop has reduced its annual gain to a relatively sedate 5.4% over the last twelve months.

In spite of the heavy fall in price, ITOCHU may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 10.6x, since almost half of all companies in Japan have P/E ratios greater than 14x and even P/E's higher than 21x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Recent times haven't been advantageous for ITOCHU as its earnings have been rising slower than most other companies. It seems that many are expecting the uninspiring earnings performance to persist, which has repressed the P/E. If you still like the company, you'd be hoping earnings don't get any worse and that you could pick up some stock while it's out of favour.

See our latest analysis for ITOCHU

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Is There Any Growth For ITOCHU?

In order to justify its P/E ratio, ITOCHU would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. Still, the latest three year period has seen an excellent 107% overall rise in EPS, in spite of its uninspiring short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the eight analysts covering the company suggest earnings should grow by 7.9% each year over the next three years. Meanwhile, the rest of the market is forecast to expand by 9.6% per annum, which is not materially different.

With this information, we find it odd that ITOCHU is trading at a P/E lower than the market. It may be that most investors are not convinced the company can achieve future growth expectations.

The Bottom Line On ITOCHU's P/E

ITOCHU's recently weak share price has pulled its P/E below most other companies. 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 ITOCHU currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for ITOCHU that you should be aware of.

Of course, you might also be able to find a better stock than ITOCHU. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com