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Cabot Microelectronics Corporation's (NASDAQ:CCMP) Share Price Matching Investor Opinion

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Cabot Microelectronics Corporation's (NASDAQ:CCMP) price-to-earnings (or "P/E") ratio of 50x might make it look like a strong sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 18x and even P/E's below 10x are quite common. 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.

With earnings that are retreating more than the market's of late, Cabot Microelectronics has been very sluggish. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.

See our latest analysis for Cabot Microelectronics

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Want the full picture on analyst estimates for the company? Then our free report on Cabot Microelectronics will help you uncover what's on the horizon.

How Is Cabot Microelectronics' Growth Trending?

In order to justify its P/E ratio, Cabot Microelectronics would need to produce outstanding growth well in excess of 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 24%. This means it has also seen a slide in earnings over the longer-term as EPS is down 9.9% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 99% as estimated by the five analysts watching the company. With the market only predicted to deliver 5.0%, the company is positioned for a stronger earnings result.

With this information, we can see why Cabot Microelectronics is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

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 Cabot Microelectronics 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.

You always need to take note of risks, for example - Cabot Microelectronics has 4 warning signs we think you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).

This article by Simply Wall St is general in nature. 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.

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