When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider Gartner, Inc. (NYSE:IT) as a stock to avoid entirely with its 37.4x 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 lofty.
Gartner 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. If not, then existing shareholders might be a little nervous about the viability of the share price.
See our latest analysis for Gartner
Is There Enough Growth For Gartner?
The only time you'd be truly comfortable seeing a P/E as steep as Gartner's is when the company's growth is on track to outshine the market decidedly.
If we review the last year of earnings growth, the company posted a terrific increase of 25%. Pleasingly, EPS has also lifted 396% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.
Looking ahead now, EPS is anticipated to slump, contracting by 6.2% during the coming year according to the ten analysts following the company. With the market predicted to deliver 10% growth , that's a disappointing outcome.
With this information, we find it concerning that Gartner is trading at a P/E higher than the market. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh heavily on the share price eventually.
The Bottom Line On Gartner's P/E
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 Gartner currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
Plus, you should also learn about these 2 warning signs we've spotted with Gartner.
If you're unsure about the strength of Gartner'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.
