Peab AB (publ)'s (STO:PEAB B) Shares Lagging The Market But So Is The Business

With a price-to-earnings (or "P/E") ratio of 14.2x Peab AB (publ) (STO:PEAB B) may be sending bullish signals at the moment, given that almost half of all companies in Sweden have P/E ratios greater than 24x and even P/E's higher than 40x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

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Recent times have been advantageous for Peab as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for Peab

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

Does Growth Match The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like Peab's to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 13% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 35% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 15% per year as estimated by the three analysts watching the company. With the market predicted to deliver 18% growth each year, the company is positioned for a weaker earnings result.

With this information, we can see why Peab is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Peab maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Plus, you should also learn about these 3 warning signs we've spotted with Peab (including 1 which doesn't sit too well with us).

If you're unsure about the strength of Peab'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.