When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 10x, you may consider COSCO SHIPPING Ports Limited (HKG:1199) as an attractive investment with its 6.6x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
There hasn't been much to differentiate COSCO SHIPPING Ports' and the market's earnings growth lately. It might be that many expect the mediocre earnings performance to degrade, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could pick up some stock while it's out of favour.
SEHK:1199 Price to Earnings Ratio vs Industry April 6th 2024 Want the full picture on analyst estimates for the company? Then our free report on COSCO SHIPPING Ports will help you uncover what's on the horizon.
What Are Growth Metrics Telling Us About The Low P/E?
In order to justify its P/E ratio, COSCO SHIPPING Ports would need to produce sluggish growth that's trailing the market.
If we review the last year of earnings growth, the company posted a worthy increase of 2.8%. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 16% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 3.1% per year over the next three years. Meanwhile, the rest of the market is forecast to expand by 14% per annum, which is noticeably more attractive.
With this information, we can see why COSCO SHIPPING Ports is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.
The Key Takeaway
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
As we suspected, our examination of COSCO SHIPPING Ports' analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
It is also worth noting that we have found 3 warning signs for COSCO SHIPPING Ports (1 shouldn't be ignored!) that you need to take into consideration.
You might be able to find a better investment than COSCO SHIPPING Ports. 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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