When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 17x, you may consider Snap-on Incorporated (NYSE:SNA) as an attractive investment with its 14x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Recent times have been pleasing for Snap-on as its earnings have risen in spite of the market's earnings going into reverse. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. 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.
Check out our latest analysis for Snap-on
Does Growth Match The Low P/E?
There's an inherent assumption that a company should underperform the market for P/E ratios like Snap-on's to be considered reasonable.
Retrospectively, the last year delivered a decent 12% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 66% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Shifting to the future, estimates from the eleven analysts covering the company suggest earnings should grow by 4.2% per annum over the next three years. That's shaping up to be materially lower than the 10% per annum growth forecast for the broader market.
With this information, we can see why Snap-on 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.
What We Can Learn From Snap-on's P/E?
We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
As we suspected, our examination of Snap-on's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. 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.
A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Snap-on with six simple checks will allow you to discover any risks that could be an issue.
Of course, you might also be able to find a better stock than Snap-on. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.
About NYSE:SNA
Snap-on
Manufactures and markets tools, equipment, diagnostics, and repair information and systems solutions for professional users worldwide.
Flawless balance sheet established dividend payer.
