Wal-Mart de México, S.A.B. de C.V.'s (BMV:WALMEX) Price Is Out Of Tune With Earnings

When close to half the companies in Mexico have price-to-earnings ratios (or "P/E's") below 11x, you may consider Wal-Mart de México, S.A.B. de C.V. (BMV:WALMEX) as a stock to avoid entirely with its 17.5x P/E ratio. 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.

Recent times haven't been advantageous for Wal-Mart de México. de as its earnings have been rising slower than most other companies. One possibility is that the P/E is high because investors think this lacklustre earnings performance will improve markedly. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Wal-Mart de México. de

Want the full picture on analyst estimates for the company? Then our free report on Wal-Mart de México. de will help you uncover what's on the horizon.

What Are Growth Metrics Telling Us About The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as Wal-Mart de México. de's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a decent 4.1% gain to the company's bottom line. The latest three year period has also seen a 23% overall rise in EPS, aided somewhat 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.

Looking ahead now, EPS is anticipated to climb by 11% per year during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 14% per annum growth forecast for the broader market.

With this information, we find it concerning that Wal-Mart de México. de 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.

The Key Takeaway

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Wal-Mart de México. de's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near 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 high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You always need to take note of risks, for example - Wal-Mart de México. de has 1 warning sign we think you should be aware of.

You might be able to find a better investment than Wal-Mart de México. de. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.