Otsuka Corporation's (TSE:4768) Popularity With Investors Is Under Threat From Overpricing
Otsuka Corporation (TSE:4768) faces investor concerns due to its high P/E ratio of 24.8x, significantly above the market average. Despite a 13% earnings growth last year and a 34% rise in EPS over three years, analysts predict only 7% growth in the next three years, below the market's 9.2%. This raises doubts about the sustainability of its share price, as the high P/E may not be justified by future earnings. Investors should be cautious, as the current optimism may lead to disappointment if earnings do not meet expectations.
With a price-to-earnings (or "P/E") ratio of 24.8x Otsuka Corporation (TSE:4768) may be sending very bearish signals at the moment, given that almost half of all companies in Japan have P/E ratios under 13x and even P/E's lower than 9x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.
With earnings growth that's superior to most other companies of late, Otsuka has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.
See our latest analysis for Otsuka
Keen to find out how analysts think Otsuka's future stacks up against the industry? In that case, our free report is a great place to start.
What Are Growth Metrics Telling Us About The High P/E?
In order to justify its P/E ratio, Otsuka would need to produce outstanding growth well in excess of the market.
Retrospectively, the last year delivered a decent 13% gain to the company's bottom line. The latest three year period has also seen an excellent 34% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.
Shifting to the future, estimates from the twelve analysts covering the company suggest earnings should grow by 7.0% each year over the next three years. With the market predicted to deliver 9.2% growth per year, the company is positioned for a weaker earnings result.
With this information, we find it concerning that Otsuka is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.
The Final Word
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
Our examination of Otsuka's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.
It is also worth noting that we have found 2 warning signs for Otsuka (1 doesn't sit too well with us!) that you need to take into consideration.
If these risks are making you reconsider your opinion on Otsuka, explore our interactive list of high quality stocks to get an idea of what else is out there.
