When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 19x, you may consider Motorola Solutions, Inc. (NYSE:MSI) as a stock to avoid entirely with its 53.5x 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.
Motorola Solutions hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.
View our latest analysis for Motorola Solutions
How Is Motorola Solutions' Growth Trending?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Motorola Solutions' to be considered reasonable.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 7.6%. 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 26% in total. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.
Shifting to the future, estimates from the twelve analysts covering the company suggest earnings should grow by 20% each year over the next three years. With the market only predicted to deliver 11% per annum, the company is positioned for a stronger earnings result.
With this information, we can see why Motorola Solutions is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Bottom Line On Motorola Solutions' P/E
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 Motorola Solutions' 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.
You should always think about risks. Case in point, we've spotted 3 warning signs for Motorola Solutions you should be aware of.
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.
About NYSE:MSI
Motorola Solutions
Provides public safety and enterprise security solutions in the United States, the United Kingdom, Canada, and internationally.
Adequate balance sheet average dividend payer.
