Frequency Electronics, Inc. (NASDAQ:FEIM) Held Back By Insufficient Growth Even After Shares Climb 28%

Frequency Electronics, Inc. (NASDAQ:FEIM) shares have continued their recent momentum with a 28% gain in the last month alone. The last month tops off a massive increase of 100% in the last year.

Although its price has surged higher, Frequency Electronics' price-to-earnings (or "P/E") ratio of 10.9x might still make it look like a buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 19x and even P/E's above 34x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

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Recent times have been advantageous for Frequency Electronics as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, 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.

Check out our latest analysis for Frequency Electronics

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How Is Frequency Electronics' Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Frequency Electronics' to be considered reasonable.

Retrospectively, the last year delivered an exceptional 315% gain to the company's bottom line. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 8.0% per annum as estimated by the sole analyst watching the company. Meanwhile, the broader market is forecast to expand by 11% each year, which paints a poor picture.

In light of this, it's understandable that Frequency Electronics' P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

Despite Frequency Electronics' shares building up a head of steam, its P/E still lags most other companies. 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.

We've established that Frequency Electronics maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Having said that, be aware Frequency Electronics is showing 1 warning sign in our investment analysis, you should know about.

Of course, you might also be able to find a better stock than Frequency Electronics. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.