When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider MillerKnoll, Inc. (NASDAQ:MLKN) as a stock to avoid entirely with its 43.3x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
With earnings that are retreating more than the market's of late, MillerKnoll has been very sluggish. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.
How Is MillerKnoll's Growth Trending?
There's an inherent assumption that a company should far outperform the market for P/E ratios like MillerKnoll's to be considered reasonable.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 35%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.
Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 182% over the next year. Meanwhile, the rest of the market is forecast to only expand by 13%, which is noticeably less attractive.
With this information, we can see why MillerKnoll is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Final Word
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 MillerKnoll'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. Unless these conditions change, they will continue to provide strong support to the share price.
Before you settle on your opinion, we've discovered 4 warning signs for MillerKnoll (1 is a bit concerning!) that you should be aware of.
If you're unsure about the strength of MillerKnoll's 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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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.
