CME Group Inc.’s (NASDAQ:CME) price-to-earnings (or “P/E”) ratio of 23.6x might make it look like a strong sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 14x and even P/E’s below 8x are quite common. 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.
CME Group could be doing better as it’s been growing earnings less than most other companies lately. One possibility is that the P/E is high because investors think this lacklustre earnings performance will improve markedly. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.
See our latest analysis for CME Group
If you’d like to see what analysts are forecasting going forward, you should check out our free report on CME Group.
CME Group’s P/E ratio would be typical for a company that’s expected to deliver very strong growth, and importantly, perform much better than the market.
Retrospectively, the last year delivered a decent 8.0% gain to the company’s bottom line. The solid recent performance means it was also able to grow EPS by 28% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 6.0% per year during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to expand by 8.9% per annum, which is noticeably more attractive.
In light of this, it’s alarming that CME Group’s P/E sits above the majority of other companies. 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.
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.
Our examination of CME Group’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.
There are also other vital risk factors to consider before investing and we’ve discovered 1 warning sign for CME Group that you should be aware 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 P/E ratio below 20x).
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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