With A 29% Price Drop For Pierce Group AB (publ) (STO:PIERCE) You'll Still Get What You Pay For

By
Simply Wall St
Published
May 12, 2022
OM:PIERCE
Source: Shutterstock

To the annoyance of some shareholders, Pierce Group AB (publ) (STO:PIERCE) shares are down a considerable 29% in the last month, which continues a horrid run for the company. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 75% loss during that time.

Although its price has dipped substantially, Pierce Group's price-to-earnings (or "P/E") ratio of 66.1x might still make it look like a strong sell right now compared to the market in Sweden, where around half of the companies have P/E ratios below 17x and even P/E's below 9x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Pierce Group could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. 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.

See our latest analysis for Pierce Group

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OM:PIERCE Price Based on Past Earnings May 12th 2022
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Pierce Group.

Does Growth Match The High P/E?

Pierce Group's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 15%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 117% per year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 17% per year, which is noticeably less attractive.

With this information, we can see why Pierce Group is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

A significant share price dive has done very little to deflate Pierce Group's very lofty P/E. 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.

As we suspected, our examination of Pierce Group's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Plus, you should also learn about these 3 warning signs we've spotted with Pierce Group.

If these risks are making you reconsider your opinion on Pierce Group, explore our interactive list of high quality stocks to get an idea of what else is out there.

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