After Leaping 33% Continental Aktiengesellschaft (ETR:CON) Shares Are Not Flying Under The Radar

Continental Aktiengesellschaft (ETR:CON) shareholders are no doubt pleased to see that the share price has bounced 33% in the last month, although it is still struggling to make up recently lost ground. But not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 42% in the last twelve months.

Following the firm bounce in price, given close to half the companies in Germany have price-to-earnings ratios (or "P/E's") below 15x, you may consider Continental as a stock to avoid entirely with its 30.7x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Continental 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. If not, then existing shareholders may be very nervous about the viability of the share price.

View our latest analysis for Continental

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Want the full picture on analyst estimates for the company? Then our free report on Continental will help you uncover what's on the horizon.

Is There Enough Growth For Continental?

Continental'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.

If we review the last year of earnings growth, the company posted a worthy increase of 4.8%. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 83% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 77% per year as estimated by the analysts watching the company. With the market only predicted to deliver 14% per year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Continental's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

The strong share price surge has got Continental's P/E rushing to great heights as well. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Continental's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Continental you should know about.

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

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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