Regeneron Pharmaceuticals, Inc.'s (NASDAQ:REGN) Popularity With Investors Is Under Threat From Overpricing

With a price-to-earnings (or "P/E") ratio of 24.4x Regeneron Pharmaceuticals, Inc. (NASDAQ:REGN) may be sending 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 elevated P/E.

Regeneron Pharmaceuticals has been struggling lately as its earnings have declined faster than most other companies. 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. If not, then existing shareholders may be very nervous about the viability of the share price.

Check out our latest analysis for Regeneron Pharmaceuticals

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How Is Regeneron Pharmaceuticals' Growth Trending?

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

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 8.5%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 12% in total. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 8.0% per year over the next three years. Meanwhile, the rest of the market is forecast to expand by 11% each year, which is noticeably more attractive.

With this information, we find it concerning that Regeneron Pharmaceuticals is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Regeneron Pharmaceuticals' 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.

We've established that Regeneron Pharmaceuticals 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.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Regeneron Pharmaceuticals you should know about.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.