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Fewer Investors Than Expected Jumping On Tower Limited (NZSE:TWR)

Simply Wall St
·4-min read

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Tower Limited's (NZSE:TWR) price-to-earnings (or "P/E") ratio of 11.4x might make it look like a buy right now compared to the market in New Zealand, where around half of the companies have P/E ratios above 19x and even P/E's above 34x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been pleasing for Tower as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Tower

Does Tower Have A Relatively High Or Low P/E For Its Industry?

An inspection of average P/E's throughout Tower's industry may help to explain its low P/E ratio. You'll notice in the figure below that P/E ratios in the Insurance industry are also lower than the market. So this certainly goes a fair way towards explaining the company's ratio right now. Ordinarily, the majority of companies' P/E's would be compressed by the general conditions within the Insurance industry. Ultimately though, it's going to be the fundamentals of the business like earnings and growth that count most.

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If you'd like to see what analysts are forecasting going forward, you should check out our free report on Tower.

Is There Any Growth For Tower?

The only time you'd be truly comfortable seeing a P/E as low as Tower's is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered a decent 6.3% gain to the company's bottom line. Although, the latest three year period in total hasn't been as good as it didn't manage to provide any growth at all. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 7.4% each year during the coming three years according to the two analysts following the company. Meanwhile, the rest of the market is forecast to expand by 7.7% per year, which is not materially different.

With this information, we find it odd that Tower is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

What We Can Learn From Tower's P/E?

The price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Tower currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

Plus, you should also learn about this 1 warning sign we've spotted with Tower.

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

This article by Simply Wall St is general in nature. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.