Teradyne, Inc.'s (NASDAQ:TER) Stock Retreats 28% But Earnings Haven't Escaped The Attention Of Investors

Unfortunately for some shareholders, the Teradyne, Inc. (NASDAQ:TER) share price has dived 28% in the last thirty days, prolonging recent pain. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 27% share price drop.

Even after such a large drop in price, Teradyne may still be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 24.7x, since almost half of all companies in the United States have P/E ratios under 17x and even P/E's lower than 10x 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.

Recent times have been advantageous for Teradyne as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Teradyne

Keen to find out how analysts think Teradyne's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Teradyne's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 17% gain to the company's bottom line. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 45% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 23% each year as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 11% per year, which is noticeably less attractive.

In light of this, it's understandable that Teradyne's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

There's still some solid strength behind Teradyne's P/E, if not its share price lately. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Teradyne'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.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Teradyne with six simple checks on some of these key factors.

You might be able to find a better investment than Teradyne. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.