With a price-to-earnings (or "P/E") ratio of 12.3x Nomad Foods Limited (NYSE:NOMD) may be sending bullish signals at the moment, given that almost half of all companies in the United States have P/E ratios greater than 17x and even P/E's higher than 33x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
Nomad Foods could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.
View our latest analysis for Nomad Foods
What Are Growth Metrics Telling Us About The Low P/E?
There's an inherent assumption that a company should underperform the market for P/E ratios like Nomad Foods' to be considered reasonable.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 14%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 15% overall rise in EPS. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.
Looking ahead now, EPS is anticipated to climb by 34% during the coming year according to the eight analysts following the company. That's shaping up to be materially higher than the 10% growth forecast for the broader market.
In light of this, it's peculiar that Nomad Foods' P/E sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.
The Final Word
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.
Our examination of Nomad Foods' analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.
Before you take the next step, you should know about the 2 warning signs for Nomad Foods that we have uncovered.
If you're unsure about the strength of Nomad Foods' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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