When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider HEICO Corporation (NYSE:HEI) as a stock to avoid entirely with its 61.3x 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.
HEICO certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors' willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
See our latest analysis for HEICO
Does Growth Match The High P/E?
In order to justify its P/E ratio, HEICO would need to produce outstanding growth well in excess of the market.
Retrospectively, the last year delivered a decent 14% gain to the company's bottom line. The solid recent performance means it was also able to grow EPS by 25% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been respectable for the company.
Looking ahead now, EPS is anticipated to climb by 15% per annum during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 13% per year, which is noticeably less attractive.
In light of this, it's understandable that HEICO'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.
What We Can Learn From HEICO's P/E?
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
As we suspected, our examination of HEICO'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 HEICO (1 is a bit unpleasant!) that we have uncovered.
If these risks are making you reconsider your opinion on HEICO, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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.