Fabrinet's (NYSE:FN) 27% Share Price Surge Not Quite Adding Up

Fabrinet (NYSE:FN) shares have continued their recent momentum with a 27% gain in the last month alone. Looking further back, the 21% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

After such a large jump in price, Fabrinet may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 32.8x, since almost half of all companies in the United States have P/E ratios under 18x 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 highly elevated P/E.

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With earnings growth that's superior to most other companies of late, Fabrinet has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Fabrinet

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Fabrinet.

What Are Growth Metrics Telling Us About The High P/E?

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

Retrospectively, the last year delivered an exceptional 19% gain to the company's bottom line. Pleasingly, EPS has also lifted 80% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 14% as estimated by the eight analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 13%, which is not materially different.

With this information, we find it interesting that Fabrinet is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Final Word

Fabrinet's P/E is flying high just like its stock has during the last month. 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.

Our examination of Fabrinet's 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.

Before you settle on your opinion, we've discovered 1 warning sign for Fabrinet that you should be aware of.

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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.