There's Reason For Concern Over Amphenol Corporation's (NYSE:APH) Price
Amphenol Corporation's (NYSE:APH) price-to-earnings (or "P/E") ratio of 27.2x 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 17x and even P/E's below 9x 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.
Amphenol hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. 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.
See our latest analysis for Amphenol
Does Amphenol Have A Relatively High Or Low P/E For Its Industry?
We'd like to see if P/E's within Amphenol's industry might provide some colour around the company's particularly high P/E ratio. It turns out the Electronic industry in general also has a P/E ratio higher than the market, as the graphic below shows. So this goes some way towards explaining the company's ratio right now. In the context of the Electronic industry's current setting, most of its constituents' P/E's would be expected to be raised up. Ultimately though, it's going to be the fundamentals of the business like earnings and growth that count most.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Amphenol.
Does Growth Match The High P/E?
In order to justify its P/E ratio, Amphenol would need to produce outstanding growth well in excess of the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 5.6%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 31% 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 climb by 4.9% per annum during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to expand by 10.0% per annum, which is noticeably more attractive.
In light of this, it's alarming that Amphenol's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.
The Final Word
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
We've established that Amphenol currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
It is also worth noting that we have found 3 warning signs for Amphenol that you need to take into consideration.
If these risks are making you reconsider your opinion on Amphenol, 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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