When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 19x, you may consider Haemonetics Corporation (NYSE:HAE) as a stock to avoid entirely with its 34.7x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
Haemonetics hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.
How Is Haemonetics' Growth Trending?
In order to justify its P/E ratio, Haemonetics would need to produce outstanding growth well in excess of the market.
Retrospectively, the last year delivered a frustrating 4.2% decrease to the company's bottom line. Even so, admirably EPS has lifted 302% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.
Shifting to the future, estimates from the ten analysts covering the company suggest earnings should grow by 34% per annum over the next three years. That's shaping up to be materially higher than the 11% per year growth forecast for the broader market.
With this information, we can see why Haemonetics 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 Key Takeaway
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.
As we suspected, our examination of Haemonetics' 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.
There are also other vital risk factors to consider and we've discovered 2 warning signs for Haemonetics (1 doesn't sit too well with us!) that you should be aware of before investing here.
You might be able to find a better investment than Haemonetics. 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.
