Mitsubishi Pencil Co., Ltd.'s (TSE:7976) 25% Dip In Price Shows Sentiment Is Matching Earnings

Mitsubishi Pencil Co., Ltd. (TSE:7976) shareholders won't be pleased to see that the share price has had a very rough month, dropping 25% and undoing the prior period's positive performance. The last month has meant the stock is now only up 3.0% during the last year.

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 13x, you may still consider Mitsubishi Pencil as an attractive investment with its 8.4x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Mitsubishi Pencil as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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 out of favour.

Check out our latest analysis for Mitsubishi Pencil

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Mitsubishi Pencil.

Is There Any Growth For Mitsubishi Pencil?

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

If we review the last year of earnings growth, the company posted a terrific increase of 67%. Pleasingly, EPS has also lifted 150% in aggregate from three years ago, thanks to the last 12 months of growth. 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 one analyst covering the company suggest earnings growth is heading into negative territory, declining 3.5% per annum over the next three years. That's not great when the rest of the market is expected to grow by 9.6% each year.

With this information, we are not surprised that Mitsubishi Pencil is trading at a P/E lower than the market. 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.

The Key Takeaway

Mitsubishi Pencil's P/E has taken a tumble along with its share price. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Mitsubishi Pencil 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.

Having said that, be aware Mitsubishi Pencil is showing 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored.

You might be able to find a better investment than Mitsubishi Pencil. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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