Unpleasant Surprises Could Be In Store For Pentair plc's (NYSE:PNR) Shares

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 17x, you may consider Pentair plc (NYSE:PNR) as a stock to potentially avoid with its 20.4x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Pentair 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 Pentair

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

How Is Pentair's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 33% gain to the company's bottom line. The latest three year period has also seen an excellent 40% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 11% per year during the coming three years according to the analysts following the company. With the market predicted to deliver 11% growth per annum, the company is positioned for a comparable earnings result.

With this information, we find it interesting that Pentair is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Key Takeaway

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.

We've established that Pentair currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

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

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