Optimistic Investors Push Seibu Holdings Inc. (TSE:9024) Shares Up 28% But Growth Is Lacking

Seibu Holdings Inc. (TSE:9024) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 81%.

After such a large jump in price, Seibu Holdings may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 31.4x, since almost half of all companies in Japan have P/E ratios under 14x and even P/E's lower than 9x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Seibu Holdings could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. 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.

View our latest analysis for Seibu Holdings

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

How Is Seibu Holdings' Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Seibu Holdings' to be considered reasonable.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 52%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Looking ahead now, EPS is anticipated to climb by 4.3% per year during the coming three years according to the four analysts following the company. Meanwhile, the rest of the market is forecast to expand by 9.5% per year, which is noticeably more attractive.

With this information, we find it concerning that Seibu Holdings is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

What We Can Learn From Seibu Holdings' P/E?

Shares in Seibu Holdings have built up some good momentum lately, which has really inflated its P/E. 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.

Our examination of Seibu Holdings' analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. 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. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 4 warning signs for Seibu Holdings you should be aware of, and 2 of them are significant.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.

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