Some M3, Inc. (TSE:2413) Shareholders Look For Exit As Shares Take 26% Pounding

The M3, Inc. (TSE:2413) share price has fared very poorly over the last month, falling by a substantial 26%. For any long-term shareholders, the last month ends a year to forget by locking in a 62% share price decline.

Even after such a large drop in price, given around half the companies in Japan have price-to-earnings ratios (or "P/E's") below 12x, you may still consider M3 as a stock to potentially avoid with its 17.7x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

While the market has experienced earnings growth lately, M3's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for M3

Want the full picture on analyst estimates for the company? Then our free report on M3 will help you uncover what's on the horizon.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as M3's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a frustrating 11% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 6.5% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 11% per year over the next three years. That's shaping up to be similar to the 9.6% per annum growth forecast for the broader market.

With this information, we find it interesting that M3 is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

There's still some solid strength behind M3's P/E, if not its share price lately. 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 M3 currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for M3 with six simple checks will allow you to discover any risks that could be an issue.

If you're unsure about the strength of M3'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.