The United Laboratories International Holdings Limited (HKG:3933) shares have continued their recent momentum with a 26% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 73% in the last year.
Even after such a large jump in price, there still wouldn't be many who think United Laboratories International Holdings' price-to-earnings (or "P/E") ratio of 9.7x is worth a mention when the median P/E in Hong Kong is similar at about 11x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
Recent times have been advantageous for United Laboratories International Holdings 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 you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.
Check out our latest analysis for United Laboratories International Holdings
Does Growth Match The P/E?
The only time you'd be comfortable seeing a P/E like United Laboratories International Holdings' is when the company's growth is tracking the market closely.
Taking a look back first, we see that the company grew earnings per share by an impressive 30% last year. Pleasingly, EPS has also lifted 162% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Looking ahead now, EPS is anticipated to climb by 3.8% each year during the coming three years according to the seven analysts following the company. That's shaping up to be materially lower than the 12% each year growth forecast for the broader market.
In light of this, it's curious that United Laboratories International Holdings' P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.
What We Can Learn From United Laboratories International Holdings' P/E?
United Laboratories International Holdings' stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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 United Laboratories International Holdings currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
You should always think about risks. Case in point, we've spotted 1 warning sign for United Laboratories International Holdings you should be aware of.
If these risks are making you reconsider your opinion on United Laboratories International Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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.