NYSE:MCK) may be sending very bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 18x and even P/E’s lower than 9x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it’s justified.” data-reactid=”28″>With a price-to-earnings (or “P/E”) ratio of 29.7x McKesson Corporation (NYSE:MCK) may be sending very bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 18x and even P/E’s lower than 9x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it’s justified.
With its earnings growth in positive territory compared to the declining earnings of most other companies, McKesson has been doing quite well of late. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.
See our latest analysis for McKesson ” data-reactid=”30″>See our latest analysis for McKesson
free report on McKesson.” data-reactid=”47″>If you’d like to see what analysts are forecasting going forward, you should check out our free report on McKesson.
Does Growth Match The High P/E?
There’s an inherent assumption that a company should far outperform the market for P/E ratios like McKesson’s to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 73% last year. However, this wasn’t enough as the latest three year period has seen a very unpleasant 76% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 44% per annum during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 12% per annum, which is noticeably less attractive.
With this information, we can see why McKesson is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
What We Can Learn From McKesson’s P/E?
The price-to-earnings ratio’s power isn’t primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We’ve established that McKesson maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn’t great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.
2 warning signs for McKesson that you need to take into consideration.” data-reactid=”56″>It is also worth noting that we have found 2 warning signs for McKesson that you need to take into consideration.
list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).” data-reactid=”57″>It’s important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).
Get in touch with us directly. Alternatively, email [email protected].” data-reactid=”58″>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.