There's No Escaping Fresh Del Monte Produce Inc.'s (NYSE:FDP) Muted Earnings

With a price-to-earnings (or "P/E") ratio of 10.1x Fresh Del Monte Produce Inc. (NYSE:FDP) may be sending bullish signals at the moment, given that almost half of all companies in the United States have P/E ratios greater than 17x and even P/E's higher than 31x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Fresh Del Monte Produce has been doing quite well of late. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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How Is Fresh Del Monte Produce's Growth Trending?

In order to justify its P/E ratio, Fresh Del Monte Produce would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 64% gain to the company's bottom line. Pleasingly, EPS has also lifted 400% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the one analyst covering the company suggest earnings should grow by 3.1% over the next year. With the market predicted to deliver 13% growth , the company is positioned for a weaker earnings result.

In light of this, it's understandable that Fresh Del Monte Produce's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

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.

We've established that Fresh Del Monte Produce maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. 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.

Before you take the next step, you should know about the 2 warning signs for Fresh Del Monte Produce (1 shouldn't be ignored!) that we have uncovered.

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

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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.