There's Reason For Concern Over Hubbell Incorporated's (NYSE:HUBB) Price

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider Hubbell Incorporated (NYSE:HUBB) as a stock to avoid entirely with its 28.1x 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.

Hubbell certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Hubbell

Keen to find out how analysts think Hubbell's future stacks up against the industry? In that case, our free report is a great place to start.

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

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

Retrospectively, the last year delivered an exceptional 49% gain to the company's bottom line. The latest three year period has also seen an excellent 133% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 8.0% each year during the coming three years according to the twelve analysts following the company. Meanwhile, the rest of the market is forecast to expand by 10% each year, which is noticeably more attractive.

With this information, we find it concerning that Hubbell is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Hubbell's P/E

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 Hubbell 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. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You always need to take note of risks, for example - Hubbell has 2 warning signs we think you should be aware of.

You might be able to find a better investment than Hubbell. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.