Migdal Insurance and Financial Holdings Ltd.'s (TLV:MGDL) 26% Share Price Surge Not Quite Adding Up

Migdal Insurance and Financial Holdings Ltd. (TLV:MGDL) shares have continued their recent momentum with a 26% gain in the last month alone. The annual gain comes to 154% following the latest surge, making investors sit up and take notice.

After such a large jump in price, Migdal Insurance and Financial Holdings may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 17.8x, since almost half of all companies in Israel have P/E ratios under 15x and even P/E's lower than 11x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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As an illustration, earnings have deteriorated at Migdal Insurance and Financial Holdings over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for Migdal Insurance and Financial Holdings

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Migdal Insurance and Financial Holdings will help you shine a light on its historical performance.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as Migdal Insurance and Financial Holdings' is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a frustrating 11% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 5.2% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 23% shows it's an unpleasant look.

In light of this, it's alarming that Migdal Insurance and Financial Holdings' P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Key Takeaway

The large bounce in Migdal Insurance and Financial Holdings' shares has lifted the company's P/E to a fairly high level. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Migdal Insurance and Financial Holdings currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 1 warning sign for Migdal Insurance and Financial Holdings that you should be aware of.

If these risks are making you reconsider your opinion on Migdal Insurance and Financial Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.