Risks To Shareholder Returns Are Elevated At These Prices For Isetan Mitsukoshi Holdings Ltd. (TSE:3099)
There wouldn't be many who think Isetan Mitsukoshi Holdings Ltd.'s (TSE:3099) price-to-earnings (or "P/E") ratio of 15.7x is worth a mention when the median P/E in Japan is similar at about 15x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
While the market has experienced earnings growth lately, Isetan Mitsukoshi Holdings' earnings have gone into reverse gear, which is not great. One possibility is that the P/E is moderate because investors think this poor earnings performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.
Check out our latest analysis for Isetan Mitsukoshi Holdings
Does Growth Match The P/E?
There's an inherent assumption that a company should be matching the market for P/E ratios like Isetan Mitsukoshi Holdings' to be considered reasonable.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 4.3%. Even so, admirably EPS has lifted 133% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.
Shifting to the future, estimates from the eight analysts covering the company suggest earnings should grow by 3.7% per annum over the next three years. Meanwhile, the rest of the market is forecast to expand by 9.6% per year, which is noticeably more attractive.
In light of this, it's curious that Isetan Mitsukoshi Holdings' P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.
The Key Takeaway
It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
We've established that Isetan Mitsukoshi Holdings currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
It is also worth noting that we have found 1 warning sign for Isetan Mitsukoshi Holdings that you need to take into consideration.
If these risks are making you reconsider your opinion on Isetan Mitsukoshi Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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.
About TSE:3099
Isetan Mitsukoshi Holdings
Engages in the department store business in Japan and internationally.
Excellent balance sheet average dividend payer.
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