Why We’re Not Concerned About Ingredion Incorporated’s Share Price (NYSE: INGR)
Ingredion Incorporated (NYSE: INGR) A price-to-earnings (or “P / E”) ratio of 42.6x could give the impression that selling is strong right now relative to the US market, where about half of the companies have a P / E ratios less than 17x and even P / E less than 10x are quite common. Nonetheless, we’ll need to dig a little deeper to determine if there is a rational basis for the very high P / E.
Ingredion could do better as its earnings have fallen in recent times while most other companies have recorded positive earnings growth. One possibility is that the P / E is high because investors think this poor earnings performance will turn the page. You really hope so, otherwise you are paying a pretty high price for no particular reason.
NYSE: INGR Price based on past earnings September 4, 2021
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Does growth match high P / E?
Ingredion’s P / E ratio would be typical of a company expected to experience very strong growth and, most importantly, much better performance than the market.
Looking back over the past year, the company’s profits have fallen discouragingly by 60%. The past three years aren’t looking good either, as the company has cut its EPS by 71% overall. So, unfortunately, we have to recognize that the company did not do a great job of increasing its profits during this period.
As for the outlook, the next three years are expected to generate growth of 60% per year according to the estimates of the five analysts who watch the company. Meanwhile, the rest of the market is only expected to grow by 12% each year, which is significantly less attractive.
With this information we can see why Ingredion is trading at such a high P / E relative to the market. It appears that most investors expect this strong future growth and are prepared to pay more for the stock.
What can we learn from the P / E of Ingredion?
While the price-to-earnings ratio shouldn’t be the determining factor in whether or not you buy a stock, it’s a pretty effective barometer of earnings expectations.
We have established that Ingredion maintains its high P / E due to its expected growth above the broader market as expected. Right now, shareholders are comfortable with the P / E because they are quite confident that future earnings are not threatened. It is difficult to see the share price drop sharply in the near future under these circumstances.
You always have to think about the risks. Concrete example, we have spotted 4 warning signs for Ingredion you must be aware.
It’s important to make sure you research a great company, not just the first idea you come across. So take a look at this free list of interesting companies with recent strong earnings growth (and a P / E ratio of less than 20x).
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