The combination of slowing earnings growth and high earnings multiples is often seen as a warning sign that shares in the company could fall. Here are four companies that are seeing earnings growth slowandrelatively high forward P/E valuations:
Reckitt Benckiser (LSE: RB), the consumer brands company, reported its first-half results today. In the second quarter of 2015, revenues grew by only 1%, as the stronger sterling continued to weigh on results. Underlying EPS in the first half still grew by 7% though, as the company benefited from lower input costs, following its cost-efficiency plan and lower commodity prices.
Analysts expect underlying EPS will grow 2% this year, to 238.4 pence, which implies a forward P/E of 25.0. Although margins expansion has partially offset the impact of slowing revenues on earnings, much of the easier cost savings have already been realised, and raising prices further could run the risk of customers switching brands.
Its dividend yield of 2.3% is very low, and the need to continue to fund acquisitions and growth capital spending would mean that there is limited scope for any increases in the dividend in the near term.
Although Reckitts wide economic moat (as demonstrated by its gross profit margin of 57.6%) means it does deserve a higher valuation multiple on earnings, a forward P/E of 25.0 just seems too high.
Burberrys (LSE: BRBY) retail like-for-like sales growth slowed to just 6% in the three months leading up to 30 June, as sales in Hong Kong continued to decline and growth in mainland China slowed to the mid-single digits. The anti-graft campaign in China and brand weariness has hit the company particularly hard because of its reliance on the Chinese market. Burberry is looking to offset its China woes by increasing its presence in Japan, but earnings growth is likely to remain slower than what it has been in the past.
Analysts expect underlying EPS will grow by less than 1% this year, before recovering to 10% in the following year. With forecasts of 2015 underlying EPS of 78.7 pence, its forward P/E is 20.2 in 2015.
Next (LSE: NXT) has had an amazing past few years. Revenues have grown 17% over the past five years, whilst underlying EPS has more than doubled, from 188.5 pence in 2010 to 419.8 pence last year. But the fashion industry is extremely dynamic. Fashion tastes change quickly, and this creates huge uncertainties in estimating the long-term earnings potential.
Analysts expect underlying EPS growth is likely to slow to just 3% this year, to 431.4 pence. This gives its shares a forward P/E of 17.6, which seems relatively high when you consider the uncertainties facing the company.
The company is scheduled to report its second quarter trading update tomorrow.
Sports Direct (LSE: SPD) has seen underlying EPS grow by a compound average growth rate of 26% over the past five years, but growth is slowing quite rapidly. Analysts expect underlying EPS will grow by 10% this year, and by the same amount in the following year as well.
Although underlying EPS growth is also slowing for Sports Direct, it is still expected to grow at a relatively fast past over the next few years. On top of this, its forward looking earnings multiples are lower than the other shares mentioned here. Its forward P/E is just 17.6, and by 2016 its forward P/E ratio is expected to fall to just 15.6. Despite slowing growth, Sports Direct is probably still worth buying on its cheaper valuations.
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Jack Tang has no position in any shares mentioned. The Motley Fool UK has recommended Burberry and Sports Direct International. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.