When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 18x, you may consider MillerKnoll, Inc. (NASDAQ:MLKN) as a stock to potentially avoid with its 25.9x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.
MillerKnoll 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.
Does Growth Match The High P/E?
There's an inherent assumption that a company should outperform the market for P/E ratios like MillerKnoll's to be considered reasonable.
Retrospectively, the last year delivered an exceptional 103% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 40% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 102% during the coming year according to the four analysts following the company. That's shaping up to be materially higher than the 15% growth forecast for the broader market.
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 Key Takeaway
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
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 take the next step, you should know about the 3 warning signs for MillerKnoll (1 is a bit concerning!) that we have uncovered.
You might be able to find a better investment than MillerKnoll. 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.