ITE (Holdings) Limited (HKG:8092) shares have retraced a considerable 35% in the last month, reversing a fair amount of their solid recent performance. Looking back over the past twelve months the stock has been a solid performer regardless, with a gain of 21%.
In spite of the heavy fall in price, ITE (Holdings)'s price-to-earnings (or "P/E") ratio of 15.3x might still make it look like a sell right now compared to the market in Hong Kong, where around half of the companies have P/E ratios below 11x and even P/E's below 7x 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 as high as it is.
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Earnings have risen at a steady rate over the last year for ITE (Holdings), which is generally not a bad outcome. One possibility is that the P/E is high because investors think this good earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Check out our latest analysis for ITE (Holdings)
The only time you'd be truly comfortable seeing a P/E as high as ITE (Holdings)'s is when the company's growth is on track to outshine the market.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 3.1% last year. Still, lamentably EPS has fallen 67% in aggregate from three years ago, which is disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
In contrast to the company, the rest of the market is expected to grow by 20% over the next year, which really puts the company's recent medium-term earnings decline into perspective.
With this information, we find it concerning that ITE (Holdings) is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.
There's still some solid strength behind ITE (Holdings)'s P/E, if not its share price lately. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
Our examination of ITE (Holdings) revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.
It is also worth noting that we have found 5 warning signs for ITE (Holdings) (3 shouldn't be ignored!) that you need to take into consideration.
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