Powell Industries, Inc. (NASDAQ:POWL) Stock Rockets 41% As Investors Are Less Pessimistic Than Expected

Despite an already strong run, Powell Industries, Inc. (NASDAQ:POWL) shares have been powering on, with a gain of 41% in the last thirty days. This latest share price bounce rounds out a remarkable 319% gain over the last twelve months.

After such a large jump in price, Powell Industries' price-to-earnings (or "P/E") ratio of 32x might make it look like a strong sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 18x and even P/E's below 11x 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.

Powell Industries certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Powell Industries

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

Does Growth Match The High P/E?

In order to justify its P/E ratio, Powell Industries would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 251% gain to the company's bottom line. The latest three year period has also seen an excellent 35,752% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 12% as estimated by the three analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 15%, which is noticeably more attractive.

In light of this, it's alarming that Powell Industries' P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Powell Industries' P/E?

Shares in Powell Industries have built up some good momentum lately, which has really inflated its P/E. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Powell Industries currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Powell Industries that you should be aware of.

If you're unsure about the strength of Powell Industries' 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.