When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 18x, you may consider Principal Financial Group, Inc. (NASDAQ:PFG) as an attractive investment with its 11x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.
There hasn't been much to differentiate Principal Financial Group's and the market's earnings growth lately. It might be that many expect the mediocre earnings performance to degrade, which has repressed the P/E. If not, then existing shareholders have reason to be optimistic about the future direction of the share price.
Is There Any Growth For Principal Financial Group?
In order to justify its P/E ratio, Principal Financial Group would need to produce sluggish growth that's trailing the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 42% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 14% 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 5.0% during the coming year according to the eight analysts following the company. With the market predicted to deliver 11% growth , the company is positioned for a weaker earnings result.
With this information, we can see why Principal Financial Group is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.
The Key Takeaway
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 Principal Financial Group's analyst forecasts revealed that its inferior earnings outlook 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.
The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Principal Financial Group with six simple checks on some of these key factors.
If you're unsure about the strength of Principal 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.
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