With a median price-to-earnings (or "P/E") ratio of close to 14x in Malaysia, you could be forgiven for feeling indifferent about HPP Holdings Berhad's (KLSE:HPPHB) P/E ratio of 13.4x. 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.
HPP Holdings Berhad's earnings growth of late has been pretty similar to most other companies. The P/E is probably moderate because investors think this modest earnings performance will continue. If you like the company, you'd be hoping this can at least be maintained so that you could pick up some stock while it's not quite in favour.
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Does Growth Match The P/E?
The only time you'd be comfortable seeing a P/E like HPP Holdings Berhad's is when the company's growth is tracking the market closely.
Retrospectively, the last year delivered a decent 11% gain to the company's bottom line. EPS has also lifted 13% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 8.3% during the coming year according to the two analysts following the company. With the market predicted to deliver 11% growth , the company is positioned for a weaker earnings result.
With this information, we find it interesting that HPP Holdings Berhad is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.
The Final Word
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
We've established that HPP Holdings Berhad currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.