Shenandoah Telecommunications Company’s (NASDAQ:SHEN) price-to-earnings (or “P/E”) ratio of 45.6x might make it look like a strong sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 17x and even P/E’s below 9x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it’s justified.
Shenandoah Telecommunications certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.
Check out our latest analysis for Shenandoah Telecommunications
What Are Growth Metrics Telling Us About The High P/E?
In order to justify its P/E ratio, Shenandoah Telecommunications would need to produce outstanding growth well in excess of the market.
If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. The longer-term trend has been no better as the company has no earnings growth to show for over the last three years either. Therefore, it’s fair to say that earnings growth has definitely eluded the company recently.
Turning to the outlook, the next three years should generate growth of 19% per year as estimated by the three analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 11% per year, which is noticeably less attractive.
With this information, we can see why Shenandoah Telecommunications is trading at such a high P/E compared to the market. Apparently shareholders aren’t keen to offload something that is potentially eyeing a more prosperous future.
The Final Word
It’s argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
We’ve established that Shenandoah Telecommunications maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren’t under threat. It’s hard to see the share price falling strongly in the near future under these circumstances.
You always need to take note of risks, for example – Shenandoah Telecommunications has 1 warning sign we think you should be aware of.
If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E’s below 20x.
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