What MODEC, Inc.'s (TSE:6269) 27% Share Price Gain Is Not Telling You

MODEC, Inc. (TSE:6269) shares have continued their recent momentum with a 27% gain in the last month alone. The annual gain comes to 176% following the latest surge, making investors sit up and take notice.

Although its price has surged higher, you could still be forgiven for feeling indifferent about MODEC's P/E ratio of 15.1x, since the median price-to-earnings (or "P/E") ratio in Japan is also close to 15x. 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.

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Recent times have been advantageous for MODEC as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. 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.

View our latest analysis for MODEC

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

How Is MODEC's Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 19%. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 0.3% per annum over the next three years. With the market predicted to deliver 9.6% growth per annum, the company is positioned for a weaker earnings result.

In light of this, it's curious that MODEC's P/E sits in line with the majority of other companies. 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 Bottom Line On MODEC's P/E

MODEC appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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 MODEC 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.

We don't want to rain on the parade too much, but we did also find 1 warning sign for MODEC that you need to be mindful of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.