With a price-to-earnings (or "P/E") ratio of 60.9x Cognex Corporation (NASDAQ:CGNX) may be sending very bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 16x and even P/E's lower than 9x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
Recent times haven't been advantageous for Cognex as its earnings have been falling quicker than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
NasdaqGS:CGNX Price to Earnings Ratio vs Industry March 19th 2024
Want the full picture on analyst estimates for the company? Then our free report on Cognex will help you uncover what's on the horizon.
Does Growth Match The High P/E?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Cognex's to be considered reasonable.
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 47%. The last three years don't look nice either as the company has shrunk EPS by 35% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Turning to the outlook, the next three years should generate growth of 34% per year as estimated by the analysts watching the company. That's shaping up to be materially higher than the 10% each year growth forecast for the broader market.
With this information, we can see why Cognex 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.
The Bottom Line On Cognex's P/E
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 Cognex's 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. Unless these conditions change, they will continue to provide strong support to the share price.
We don't want to rain on the parade too much, but we did also find 1 warning sign for Cognex that you need to be mindful of.
Of course, you might also be able to find a better stock than Cognex. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.