With a price-to-earnings (or "P/E") ratio of 14.7x StarHub Ltd (SGX:CC3) may be sending bearish signals at the moment, given that almost half of all companies in Singapore 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, StarHub'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 StarHub
What Are Growth Metrics Telling Us About The High P/E?
In order to justify its P/E ratio, StarHub 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 4.3%. This means it has also seen a slide in earnings over the longer-term as EPS is down 17% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 6.2% per annum over the next three years. That's shaping up to be materially higher than the 1.7% per annum growth forecast for the broader market.
With this information, we can see why StarHub is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
What We Can Learn From StarHub's P/E?
Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
As we suspected, our examination of StarHub'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 StarHub that we have uncovered.
Of course, you might also be able to find a better stock than StarHub. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.
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