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Unpleasant Surprises Could Be In Store For Affiliated Managers Group, Inc.'s (NYSE:AMG) Shares

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There wouldn't be many who think Affiliated Managers Group, Inc.'s (NYSE:AMG) price-to-earnings (or "P/E") ratio of 20.5x is worth a mention when the median P/E in the United States is similar at about 19x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Recent times have been advantageous for Affiliated Managers Group as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

See our latest analysis for Affiliated Managers Group

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If you'd like to see what analysts are forecasting going forward, you should check out our free report on Affiliated Managers Group.

Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like Affiliated Managers Group's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered an exceptional 100% gain to the company's bottom line. Still, incredibly EPS has fallen 37% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 11% per annum as estimated by the eight analysts watching the company. With the market predicted to deliver 14% growth per year, the company is positioned for a weaker earnings result.

With this information, we find it interesting that Affiliated Managers Group is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Affiliated Managers Group's P/E

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.

We've established that Affiliated Managers Group currently trades on a 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 moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Affiliated Managers Group (1 can't be ignored!) that you need to be mindful of.

Of course, you might also be able to find a better stock than Affiliated Managers Group. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.

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 (at) simplywallst.com.