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When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 16x, you may consider Adecoagro S.A. (NYSE:AGRO) as a highly attractive investment with its 6.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.
Adecoagro certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
See our latest analysis for Adecoagro
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Adecoagro.
Is There Any Growth For Adecoagro?
In order to justify its P/E ratio, Adecoagro would need to produce anemic growth that's substantially trailing the market.
If we review the last year of earnings growth, the company posted a terrific increase of 146%. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
Looking ahead now, EPS is anticipated to slump, contracting by 7.1% per year during the coming three years according to the six analysts following the company. That's not great when the rest of the market is expected to grow by 11% each year.
With this information, we are not surprised that Adecoagro is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.
The Final Word
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.
We've established that Adecoagro maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.
You should always think about risks. Case in point, we've spotted 2 warning signs for Adecoagro you should be aware of.