Potential Upside For STV Group plc (LON:STVG) Not Without Risk
With a median price-to-earnings (or "P/E") ratio of close to 17x in the United Kingdom, you could be forgiven for feeling indifferent about STV Group plc's (LON:STVG) P/E ratio of 18.5x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
With earnings that are retreating more than the market's of late, STV Group has been very sluggish. One possibility is that the P/E is moderate because investors think the company's earnings trend will eventually fall in line with most others in the market. You'd much rather the company wasn't bleeding earnings if you still believe in the business. Or at the very least, you'd be hoping it doesn't keep underperforming if your plan is to pick up some stock while it's not in favour.
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Does Growth Match The P/E?
STV Group's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 63%. As a result, earnings from three years ago have also fallen 53% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 41% per year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 15% each year, which is noticeably less attractive.
In light of this, it's curious that STV Group's P/E sits in line with the majority of other companies. It may be that most investors aren't convinced the company can achieve future growth expectations.
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 STV Group currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.
You always need to take note of risks, for example - STV Group has 4 warning signs we think you should be aware of.
Of course, you might also be able to find a better stock than STV 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.
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