Ocean Line Port Development Limited (HKG:8502) shareholders won't be pleased to see that the share price has had a very rough month, dropping 25% and undoing the prior period's positive performance. Longer-term shareholders would now have taken a real hit with the stock declining 9.2% in the last year.
In spite of the heavy fall in price, given about half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 10x, you may still consider Ocean Line Port Development as a highly attractive investment with its 3.7x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.
For example, consider that Ocean Line Port Development's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.
Does Growth Match The Low P/E?
The only time you'd be truly comfortable seeing a P/E as depressed as Ocean Line Port Development's is when the company's growth is on track to lag the market decidedly.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 7.8%. Even so, admirably EPS has lifted 33% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 22% shows it's noticeably less attractive on an annualised basis.
With this information, we can see why Ocean Line Port Development is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.
The Key Takeaway
Shares in Ocean Line Port Development have plummeted and its P/E is now low enough to touch the ground. 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.
We've established that Ocean Line Port Development maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.
Having said that, be aware Ocean Line Port Development is showing 2 warning signs in our investment analysis, you should know about.
You might be able to find a better investment than Ocean Line Port Development. 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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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.