CCL Industries Inc.'s (TSE:CCL.B) Price Is Out Of Tune With Earnings

When close to half the companies in Canada have price-to-earnings ratios (or "P/E's") below 13x, you may consider CCL Industries Inc. (TSE:CCL.B) as a stock to potentially avoid with its 16.3x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

With earnings growth that's inferior to most other companies of late, CCL Industries has been relatively sluggish. It might be that many expect the uninspiring earnings performance to recover significantly, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

Check out our latest analysis for CCL Industries

Keen to find out how analysts think CCL Industries' future stacks up against the industry? In that case, our free report is a great place to start.

What Are Growth Metrics Telling Us About The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like CCL Industries' to be considered reasonable.

Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. Although pleasingly EPS has lifted 37% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 7.6% as estimated by the ten analysts watching the company. Although, this is simply shaping up to be in line with the broader market, which is also set to decline 9.2%.

With this information, it's perhaps curious that CCL Industries is trading at a higher P/E in comparison. With earnings going in reverse, it's not guaranteed that the P/E has found a floor yet. Maintaining these prices will be difficult to achieve as the weak outlook is likely to weigh down the shares eventually.

The Key Takeaway

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.

Our examination of CCL Industries' analyst forecasts revealed that its equally shaky outlook against the market isn't impacting its high P/E as much as we would have predicted. When we see this average earnings outlook, we suspect the share price is at risk of declining, sending the high P/E lower. In addition, we are concerned whether the company can maintain this level of performance under these tough market conditions. Unless the company's prospects improve, it's challenging to accept these prices as being reasonable.

Having said that, be aware CCL Industries is showing 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us.

You might be able to find a better investment than CCL Industries. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

If you decide to trade CCL Industries, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account.Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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