Getting In Cheap On Biogen Inc. (NASDAQ:BIIB) Might Be Difficult

With a price-to-earnings (or "P/E") ratio of 25.6x Biogen Inc. (NASDAQ:BIIB) may be sending very bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 16x and even P/E's lower than 9x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With earnings that are retreating more than the market's of late, Biogen has been very sluggish. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Biogen

Want the full picture on analyst estimates for the company? Then our free report on Biogen will help you uncover what's on the horizon.

How Is Biogen's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Biogen's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 48% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 67% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 20% per annum as estimated by the analysts watching the company. With the market only predicted to deliver 13% each year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Biogen's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Biogen's P/E

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Biogen's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you take the next step, you should know about the 2 warning signs for Biogen that we have uncovered.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.