Anglo American Platinum Limited's (JSE:AMS) 26% Jump Shows Its Popularity With Investors

Anglo American Platinum Limited (JSE:AMS) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 13% in the last twelve months.

Since its price has surged higher, Anglo American Platinum may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 14.4x, since almost half of all companies in South Africa have P/E ratios under 10x and even P/E's lower than 6x 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.

While the market has experienced earnings growth lately, Anglo American Platinum's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

View our latest analysis for Anglo American Platinum

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

In order to justify its P/E ratio, Anglo American Platinum would need to produce impressive growth in excess of the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 62%. This means it has also seen a slide in earnings over the longer-term as EPS is down 83% in total over the last three years. 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 20% per year as estimated by the nine analysts watching the company. That's shaping up to be materially higher than the 16% per year growth forecast for the broader market.

In light of this, it's understandable that Anglo American Platinum'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 Final Word

The large bounce in Anglo American Platinum's shares has lifted the company's P/E to a fairly high level. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Anglo American Platinum's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you take the next step, you should know about the 2 warning signs for Anglo American Platinum that we have uncovered.

You might be able to find a better investment than Anglo American Platinum. 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.