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Wall Street JournalInsufficient Growth At Magellan Financial Group Limited (ASX:MFG) Hampers Share Price
With a price-to-earnings (or "P/E") ratio of 9.4x Magellan Financial Group Limited (ASX:MFG) may be sending very bullish signals at the moment, given that almost half of all companies in Australia have P/E ratios greater than 22x and even P/E's higher than 40x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
Magellan Financial Group could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.
View our latest analysis for Magellan Financial Group
Is There Any Growth For Magellan Financial Group?
There's an inherent assumption that a company should far underperform the market for P/E ratios like Magellan Financial Group's to be considered reasonable.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 30%. The last three years don't look nice either as the company has shrunk EPS by 53% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Looking ahead now, EPS is anticipated to slump, contracting by 3.3% per annum during the coming three years according to the eight analysts following the company. Meanwhile, the broader market is forecast to expand by 17% per annum, which paints a poor picture.
With this information, we are not surprised that Magellan Financial Group is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.
The Bottom Line On Magellan Financial Group's P/E
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.
As we suspected, our examination of Magellan Financial Group's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
Plus, you should also learn about these 2 warning signs we've spotted with Magellan Financial Group (including 1 which is potentially serious).
If you're unsure about the strength of Magellan Financial Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.