Fabrinet's (NYSE:FN) Share Price Could Signal Some Risk
When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider Fabrinet (NYSE:FN) as a stock to avoid entirely with its 27.6x 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.
Recent times have been pleasing for Fabrinet as its earnings have risen in spite of the market's earnings going into reverse. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Check out our latest analysis for Fabrinet
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Does Growth Match The High P/E?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Fabrinet's to be considered reasonable.
Retrospectively, the last year delivered a decent 14% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 109% in total over the last three years. 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 13% per annum during the coming three years according to the six analysts following the company. That's shaping up to be similar to the 12% each year growth forecast for the broader market.
With this information, we find it interesting that Fabrinet is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.
The Key Takeaway
Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
Our examination of Fabrinet's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
Before you settle on your opinion, we've discovered 1 warning sign for Fabrinet that you should be aware of.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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.
