Getting In Cheap On Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) Is Unlikely

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 17x, you may consider Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) as a stock to avoid entirely with its 28.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Recent times have been pleasing for Vertex Pharmaceuticals as its earnings have risen in spite of the market's earnings going into reverse. 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 Vertex Pharmaceuticals

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

How Is Vertex Pharmaceuticals' Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Vertex Pharmaceuticals' to be considered reasonable.

Retrospectively, the last year delivered a decent 8.3% gain to the company's bottom line. The latest three year period has also seen an excellent 34% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 11% per year as estimated by the analysts watching the company. With the market predicted to deliver 10% growth per year, the company is positioned for a comparable earnings result.

In light of this, it's curious that Vertex Pharmaceuticals' P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Vertex Pharmaceuticals' analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. 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. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Vertex Pharmaceuticals with six simple checks on some of these key factors.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.