With a price-to-earnings (or “P/E”) ratio of 24.5x EMCOR Group, Inc. (NYSE:EME) may be sending bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 18x and even P/E’s lower than 9x are not unusual. Although, it’s not wise to just take the P/E at face value as there may be an explanation why it’s lofty.
Recent times haven’t been advantageous for EMCOR Group as its earnings have been falling quicker than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.
See our latest analysis for EMCOR Group
How Is EMCOR Group’s Growth Trending?
There’s an inherent assumption that a company should outperform the market for P/E ratios like EMCOR Group’s to be considered reasonable.
If we review the last year of earnings, dishearteningly the company’s profits fell to the tune of 48%. The last three years don’t look nice either as the company has shrunk EPS by 15% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Turning to the outlook, the next three years should generate growth of 26% per annum as estimated by the five analysts watching the company. With the market only predicted to deliver 13% per annum, the company is positioned for a stronger earnings result.
In light of this, it’s understandable that EMCOR Group’s P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
What We Can Learn From EMCOR Group’s 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.
As we suspected, our examination of EMCOR Group’s analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn’t great enough to justify a lower P/E ratio. It’s hard to see the share price falling strongly in the near future under these circumstances.
It’s always necessary to consider the ever-present spectre of investment risk. We’ve identified 3 warning signs with EMCOR Group, and understanding them should be part of your investment process.
You might be able to find a better investment than EMCOR Group. 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).
Promoted
When trading EMCOR Group or any other investment, use the platform considered by many to be the Professional’s Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account.
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.