Unpleasant Surprises Could Be In Store For Heineken Holding N.V.'s (AMS:HEIO) Shares

With a median price-to-earnings (or "P/E") ratio of close to 17x in the Netherlands, you could be forgiven for feeling indifferent about Heineken Holding N.V.'s (AMS:HEIO) P/E ratio of 17x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Heineken Holding has been struggling lately as its earnings have declined faster than most other companies. It might be that many expect the dismal earnings performance to revert back to market averages soon, which has kept the P/E from falling. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. If not, then existing shareholders may be a little nervous about the viability of the share price.

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Does Growth Match The P/E?

Heineken Holding's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 27%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 178% in total over the last three years. 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.

Looking ahead now, EPS is anticipated to climb by 4.6% during the coming year according to the lone analyst following the company. That's shaping up to be materially lower than the 7.1% growth forecast for the broader market.

With this information, we find it interesting that Heineken Holding 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. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Final Word

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Heineken Holding 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.

Having said that, be aware Heineken Holding is showing 3 warning signs in our investment analysis, and 1 of those is potentially serious.

If these risks are making you reconsider your opinion on Heineken Holding, 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.