There wouldn't be many who think nVent Electric plc's (NYSE:NVT) price-to-earnings (or "P/E") ratio of 19.9x is worth a mention when the median P/E in the United States is similar at about 18x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.
Recent times have been advantageous for nVent Electric as its earnings have been rising faster than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.
Does Growth Match The P/E?
The only time you'd be comfortable seeing a P/E like nVent Electric's is when the company's growth is tracking the market closely.
Retrospectively, the last year delivered an exceptional 42% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 133% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 5.9% per annum as estimated by the ten analysts watching the company. That's not great when the rest of the market is expected to grow by 11% each year.
In light of this, it's somewhat alarming that nVent Electric's P/E sits in line with the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh on the share price eventually.
The Key Takeaway
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.
Our examination of nVent Electric's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings are unlikely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with nVent Electric, and understanding them should be part of your investment process.
You might be able to find a better investment than nVent Electric. 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.
