Investors Still Aren't Entirely Convinced By Tower Limited's (NZSE:TWR) Earnings Despite 26% Price Jump

Despite an already strong run, Tower Limited (NZSE:TWR) shares have been powering on, with a gain of 26% in the last thirty days. The last 30 days bring the annual gain to a very sharp 79%.

Even after such a large jump in price, Tower's price-to-earnings (or "P/E") ratio of 12.3x might still make it look like a buy right now compared to the market in New Zealand, where around half of the companies have P/E ratios above 18x and even P/E's above 30x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Tower has been doing quite well of late. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Tower

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

Is There Any Growth For Tower?

The only time you'd be truly comfortable seeing a P/E as low as Tower's is when the company's growth is on track to lag the market.

If we review the last year of earnings growth, the company posted a terrific increase of 129%. The latest three year period has also seen an excellent 456% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 29% each year during the coming three years according to the three analysts following the company. That's shaping up to be materially higher than the 17% each year growth forecast for the broader market.

With this information, we find it odd that Tower is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

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

The latest share price surge wasn't enough to lift Tower's P/E close to the market median. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Tower currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

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

If you're unsure about the strength of Tower's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com