Nippon Television Holdings, Inc. (TSE:9404) Stock Rockets 25% As Investors Are Less Pessimistic Than Expected

Explore Nippon Television Holdings's Fair Values from the Community and select yours

The Nippon Television Holdings, Inc. (TSE:9404) share price has done very well over the last month, posting an excellent gain of 25%. The last 30 days bring the annual gain to a very sharp 67%.

Since its price has surged higher, Nippon Television Holdings may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 19x, since almost half of all companies in Japan have P/E ratios under 14x and even P/E's lower than 10x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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Nippon Television Holdings certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Nippon Television Holdings

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

Does Growth Match The High P/E?

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

Retrospectively, the last year delivered an exceptional 37% gain to the company's bottom line. The latest three year period has also seen a 12% overall rise in EPS, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 5.7% per annum over the next three years. Meanwhile, the rest of the market is forecast to expand by 9.9% per annum, which is noticeably more attractive.

In light of this, it's alarming that Nippon Television Holdings' P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

Nippon Television Holdings' P/E is getting right up there since its shares have risen strongly. 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 Nippon Television Holdings currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Nippon Television Holdings with six simple checks on some of these key factors.

Of course, you might also be able to find a better stock than Nippon Television Holdings. 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.