Sekisui House, Ltd. (TSE:1928) Might Not Be As Mispriced As It Looks

With a price-to-earnings (or "P/E") ratio of 9.9x Sekisui House, Ltd. (TSE:1928) may be sending bullish signals at the moment, given that 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. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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Sekisui House could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If you still 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.

See our latest analysis for Sekisui House

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

How Is Sekisui House's Growth Trending?

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

Retrospectively, the last year delivered a frustrating 4.5% decrease to the company's bottom line. Regardless, EPS has managed to lift by a handy 19% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Looking ahead now, EPS is anticipated to climb by 12% per year during the coming three years according to the nine analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 8.6% each year, which is noticeably less attractive.

In light of this, it's peculiar that Sekisui House's 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 Final Word

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 Sekisui House's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

You need to take note of risks, for example - Sekisui House has 2 warning signs (and 1 which is a bit concerning) we think you should know about.

If you're unsure about the strength of Sekisui House'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.