Hutchison Port Holdings Trust's (SGX:NS8U) price-to-earnings (or "P/E") ratio of 32.2x might make it look like a strong sell right now compared to the market in Singapore, where around half of the companies have P/E ratios below 11x and even P/E's below 7x are quite common. 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.
Hutchison Port Holdings Trust 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.
Is There Enough Growth For Hutchison Port Holdings Trust?
In order to justify its P/E ratio, Hutchison Port Holdings Trust would need to produce outstanding growth well in excess of the market.
Retrospectively, the last year delivered a frustrating 38% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 79% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Turning to the outlook, the next three years should generate growth of 33% per year as estimated by the three analysts watching the company. That's shaping up to be materially higher than the 9.9% each year growth forecast for the broader market.
With this information, we can see why Hutchison Port Holdings Trust 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
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
As we suspected, our examination of Hutchison Port Holdings Trust's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.
Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Hutchison Port Holdings Trust (1 shouldn't be ignored) you should be aware of.
Of course, you might also be able to find a better stock than Hutchison Port Holdings Trust. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.