Risks Elevated At These Prices For Vertex

 When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 14x, you may consider Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) as a stock to avoid entirely with its 22.6x 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.

Vertex Pharmaceuticals certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Vertex Pharmaceuticals

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

How Is Vertex Pharmaceuticals' Growth Trending?

Vertex Pharmaceuticals' 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.

Retrospectively, the last year delivered an exceptional 52% gain to the company's bottom line. Pleasingly, EPS has also lifted 52% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 9.1% per year during the coming three years according to the analysts following the company. That's shaping up to be similar to the 9.2% per year growth forecast for the broader market.

With this information, we find it interesting that Vertex Pharmaceuticals is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

Bottom Line On Vertex P/E

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Vertex Pharmaceuticals currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Having said that, be aware Vertex Pharmaceuticals is showing 1 warning sign in our investment analysis, you should know about.

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