The Valartis Group AG (VTX:VLRT) share price has fared very poorly over the last month, falling by a substantial 31%. To make matters worse, the recent drop has wiped out a year's worth of gains with the share price now back where it started a year ago.
Since its price has dipped substantially, Valartis Group's price-to-earnings (or "P/E") ratio of 7.3x might make it look like a strong buy right now compared to the market in Switzerland, where around half of the companies have P/E ratios above 20x and even P/E's above 33x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.
The earnings growth achieved at Valartis Group over the last year would be more than acceptable for most companies. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.
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How Is Valartis Group's Growth Trending?
There's an inherent assumption that a company should far underperform the market for P/E ratios like Valartis Group's to be considered reasonable.
Retrospectively, the last year delivered an exceptional 29% gain to the company's bottom line. Pleasingly, EPS has also lifted 504% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.
This is in contrast to the rest of the market, which is expected to grow by 11% over the next year, materially lower than the company's recent medium-term annualised growth rates.
In light of this, it's peculiar that Valartis Group's P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.
The Final Word
Having almost fallen off a cliff, Valartis Group's share price has pulled its P/E way down as well. 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.
We've established that Valartis Group currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.