Nasdaq
華爾街日報SK hynix Inc.'s (KRX:000660) 28% Price Boost Is Out Of Tune With Earnings
Despite an already strong run, SK hynix Inc. (KRX:000660) shares have been powering on, with a gain of 28% in the last thirty days. The last month tops off a massive increase of 248% in the last year.
Although its price has surged higher, it's still not a stretch to say that SK hynix's price-to-earnings (or "P/E") ratio of 13.5x right now seems quite "middle-of-the-road" compared to the market in Korea, where the median P/E ratio is around 14x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
SK hynix certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.
Check out our latest analysis for SK hynix
What Are Growth Metrics Telling Us About The P/E?
The only time you'd be comfortable seeing a P/E like SK hynix's is when the company's growth is tracking the market closely.
If we review the last year of earnings growth, the company posted a terrific increase of 242%. The latest three year period has also seen an excellent 283% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to slump, contracting by 3.9% per year during the coming three years according to the analysts following the company. Meanwhile, the broader market is forecast to expand by 21% each year, which paints a poor picture.
With this information, we find it concerning that SK hynix is trading at a fairly similar P/E to 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 negative growth outlook.
The Bottom Line On SK hynix's P/E
SK hynix's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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.
We've established that SK hynix currently trades on a higher than expected P/E for a company whose earnings are forecast to decline. When we see a poor outlook with earnings heading backwards, we suspect share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
Before you settle on your opinion, we've discovered 1 warning sign for SK hynix that you should be aware of.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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