Take Care Before Diving Into The Deep End On Reinsurance Group of America, Incorporated (NYSE:RGA)
When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 19x, you may consider Reinsurance Group of America, Incorporated (NYSE:RGA) as a highly attractive investment with its 9.4x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
Recent times haven't been advantageous for Reinsurance Group of America as its earnings have been falling quicker than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.
Check out our latest analysis for Reinsurance Group of America
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What Are Growth Metrics Telling Us About The Low P/E?
In order to justify its P/E ratio, Reinsurance Group of America would need to produce anemic growth that's substantially trailing 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 21%. This means it has also seen a slide in earnings over the longer-term as EPS is down 18% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 11% per year over the next three years. Meanwhile, the rest of the market is forecast to expand by 13% per year, which is not materially different.
In light of this, it's peculiar that Reinsurance Group of America's P/E sits below the majority of other companies. It may be that most investors are not convinced the company can achieve future growth expectations.
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 Reinsurance Group of America currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.
Having said that, be aware Reinsurance Group of America is showing 3 warning signs in our investment analysis, you should know about.
If these risks are making you reconsider your opinion on Reinsurance Group of America, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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