Stock Analysis

After Leaping 42% Aspen Pharmacare Holdings Limited (JSE:APN) Shares Are Not Flying Under The Radar

JSE:APN
Source: Shutterstock

Aspen Pharmacare Holdings Limited (JSE:APN) shares have continued their recent momentum with a 42% gain in the last month alone. The annual gain comes to 131% following the latest surge, making investors sit up and take notice.

After such a large jump in price, given close to half the companies in South Africa have price-to-earnings ratios (or "P/E's") below 11x, you may consider Aspen Pharmacare Holdings as a stock to avoid entirely with its 25.7x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times haven't been advantageous for Aspen Pharmacare Holdings as its earnings have been rising slower than most other companies. It might be that many expect the uninspiring earnings performance to recover significantly, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

View our latest analysis for Aspen Pharmacare Holdings

pe
JSE:APN Price Based on Past Earnings October 1st 2021
Want the full picture on analyst estimates for the company? Then our free report on Aspen Pharmacare Holdings will help you uncover what's on the horizon.

How Is Aspen Pharmacare Holdings' Growth Trending?

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

Taking a look back first, we see that the company managed to grow earnings per share by a handy 4.1% last year. Still, lamentably EPS has fallen 14% in aggregate from three years ago, which is disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 33% each year during the coming three years according to the five analysts following the company. That's shaping up to be materially higher than the 15% each year growth forecast for the broader market.

In light of this, it's understandable that Aspen Pharmacare Holdings' P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Aspen Pharmacare Holdings' P/E

Aspen Pharmacare Holdings' P/E is flying high just like its stock has during the last month. 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 Aspen Pharmacare Holdings' 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.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Aspen Pharmacare Holdings that you need to be mindful of.

If these risks are making you reconsider your opinion on Aspen Pharmacare Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.

Valuation is complex, but we're helping make it simple.

Find out whether Aspen Pharmacare Holdings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.