Stock Analysis

HORIBA, Ltd.'s (TSE:6856) 25% Share Price Surge Not Quite Adding Up

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Despite an already strong run, HORIBA, Ltd. (TSE:6856) shares have been powering on, with a gain of 25% in the last thirty days. The annual gain comes to 101% following the latest surge, making investors sit up and take notice.

In spite of the firm bounce in price, there still wouldn't be many who think HORIBA's price-to-earnings (or "P/E") ratio of 16.1x is worth a mention when the median P/E in Japan is similar at about 14x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

With earnings growth that's superior to most other companies of late, HORIBA has been doing relatively well. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. 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.

See our latest analysis for HORIBA

TSE:6856 Price to Earnings Ratio vs Industry March 5th 2024
If you'd like to see what analysts are forecasting going forward, you should check out our free report on HORIBA.

Does Growth Match The P/E?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 18% last year. The latest three year period has also seen an excellent 205% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 2.7% each year over the next three years. With the market predicted to deliver 10.0% growth per year, the company is positioned for a weaker earnings result.

With this information, we find it interesting that HORIBA is trading at a fairly similar P/E to the market. 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.

What We Can Learn From HORIBA's P/E?

HORIBA's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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.

Our examination of HORIBA's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. 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.

It is also worth noting that we have found 2 warning signs for HORIBA that you need to take into consideration.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

Valuation is complex, but we're helping make it simple.

Find out whether HORIBA is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.