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Examples include ResMed, QBE, Navitas, Cochlear and WorleyParsons to name a few, all of which show structural risks to what’s priced into the growth stories of each.
The market has seen top line growth evaporate in recent years, which has led to purchases in the above names at significant premiums in exchange for ‘sustainable returns’ in yield. This trade has finally caught up with market and the shares have been promptly deal with on disappointing numbers.
Given valuation risk in the high P/E names I think I should highlight one that has operation momentum behind it that might actually see it justifying its 23.5 P/E: JHX.
This is an elevated number, but by no means is it over done, and it does have near-term earnings momentum seen in the recent consensus earnings upgrades over the past three releases, which has helped propel JHX to record highs.
It also has operational momentum margins and volumes are poised to expand on the upside as the US recovery widens; increasing the demand of JHX back-end products and that should trickle into top line and bottom line numbers. It is also looking to sustained returns, having publicly stated it wants to increase its payout ratio from 30% to 50% and then 50% to 70% of annual NPAT excluding its asbestos adjustments.
This suggests that JHX has ability to justify it P/E, but it is walking a thin line, having seen its peers punished for missing expectations.