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Investors Appear Satisfied With Allegion plc's (NYSE:ALLE) Prospects

Simply Wall St
·3 mins read

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 17x, you may consider Allegion plc (NYSE:ALLE) as a stock to avoid entirely with its 29.7x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times haven't been advantageous for Allegion as its earnings have been falling quicker than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

Check out our latest analysis for Allegion

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

What Are Growth Metrics Telling Us About The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Allegion's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 26% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 38% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 5.1% during the coming year according to the ten analysts following the company. With the rest of the market predicted to shrink by 9.0%, it's still an optimal result.

With this information, it's not too hard to see why Allegion is trading at a higher P/E in comparison. However, even though the company may outperform the market, shrinking earnings are unlikely to make the P/E premium sustainable long-term. There is still potential for the P/E to fall to lower levels if the company doesn't improve its profitability.

The Bottom Line On Allegion's P/E

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Allegion's analyst forecasts revealed that its less shaky outlook against the market is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Our only concern is whether its earnings trajectory can keep outperforming under these tough market conditions. Although, if the company's prospects don't change they will continue to provide strong support to the share price.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Allegion that you should be aware of.

If these risks are making you reconsider your opinion on Allegion, 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.