Pepco Group N.V. (WSE:PCO) Not Lagging Market On Growth Or Pricing

When close to half the companies in Poland have price-to-earnings ratios (or "P/E's") below 12x, you may consider Pepco Group N.V. (WSE:PCO) as a stock to avoid entirely with its 28.6x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Pepco Group hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 41%. Still, the latest three year period has seen an excellent 25,113% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 40% per annum over the next three years. With the market only predicted to deliver 12% per annum, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Pepco Group's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

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.

As we suspected, our examination of Pepco Group's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Pepco Group that you need to be mindful of.

If these risks are making you reconsider your opinion on Pepco Group, 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.