When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 17x, you may consider MarketAxess Holdings Inc. (NASDAQ:MKTX) as a stock to avoid entirely with its 38.9x 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.
While the market has experienced earnings growth lately, MarketAxess Holdings' earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
View our latest analysis for MarketAxess Holdings
How Is MarketAxess Holdings' Growth Trending?
MarketAxess Holdings' P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 15%. This means it has also seen a slide in earnings over the longer-term as EPS is down 11% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 21% each year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 10% per annum, which is noticeably less attractive.
With this information, we can see why MarketAxess Holdings 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
We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We've established that MarketAxess Holdings 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.
Don't forget that there may be other risks. For instance, we've identified 1 warning sign for MarketAxess Holdings that you should be aware of.
Of course, you might also be able to find a better stock than MarketAxess Holdings. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.