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When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 14x, you may consider Humana Inc. (NYSE:HUM) as a stock to avoid entirely with its 24.7x P/E ratio. 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.
Humana could be doing better as it's been growing earnings less than most other companies lately. One possibility is that the P/E is high because investors think this lacklustre earnings performance will improve markedly. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
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How Is Humana's Growth Trending?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Humana's to be considered reasonable.
Retrospectively, the last year delivered a decent 7.0% gain to the company's bottom line. The latest three year period has also seen a 17% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has actually done a good job of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 17% per annum during the coming three years according to the analysts following the company. With the market only predicted to deliver 9.1% per year, the company is positioned for a stronger earnings result.
With this information, we can see why Humana 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
Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
We've established that Humana maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.
Having said that, be aware Humana is showing 1 warning sign in our investment analysis, you should know about.
If you're unsure about the strength of Humana's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.