Earnings Tell The Story For IDEC Corporation (TSE:6652) As Its Stock Soars 26%
IDEC Corporation (TSE:6652) shares have had a really impressive month, gaining 26% after a shaky period beforehand. Looking further back, the 21% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.
Since its price has surged higher, IDEC may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 37.5x, since almost half of all companies in Japan have P/E ratios under 13x and even P/E's lower than 10x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
IDEC could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.
View our latest analysis for IDEC
Is There Enough Growth For IDEC?
There's an inherent assumption that a company should far outperform the market for P/E ratios like IDEC's to be considered reasonable.
Retrospectively, the last year delivered a frustrating 11% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 78% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 45% per year during the coming three years according to the lone analyst following the company. That's shaping up to be materially higher than the 9.2% per annum growth forecast for the broader market.
In light of this, it's understandable that IDEC's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Final Word
Shares in IDEC have built up some good momentum lately, which has really inflated its P/E. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
As we suspected, our examination of IDEC's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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.
We don't want to rain on the parade too much, but we did also find 1 warning sign for IDEC that you need to be mindful of.
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 low P/E).
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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.