When close to half the companies in the United States have price-to-earnings ratios (or “P/E’s”) below 18x, you may consider Gibraltar Industries, Inc. (NASDAQ:ROCK) as a stock to potentially avoid with its 27.7x 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 its earnings growth in positive territory compared to the declining earnings of most other companies, Gibraltar Industries has been doing quite well of late. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.free report is a great place to start.
Does Growth Match The High P/E?
The only time you’d be truly comfortable seeing a P/E as high as Gibraltar Industries’ is when the company’s growth is on track to outshine the market.
Retrospectively, the last year delivered an exceptional 31% gain to the company’s bottom line. The latest three year period has also seen an excellent 227% overall rise in EPS, aided by its short-term performance. Therefore, it’s fair to say the earnings growth recently has been superb for the company.
Turning to the outlook, the next year should generate growth of 27% as estimated by the four analysts watching the company. With the market only predicted to deliver 4.4%, the company is positioned for a stronger earnings result.
In light of this, it’s understandable that Gibraltar Industries’ 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.
The Bottom Line On Gibraltar Industries’ P/E
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.
As we suspected, our examination of Gibraltar Industries’ 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. Unless these conditions change, they will continue to provide strong support to the share price.
Before you take the next step, you should know about the 1 warning sign for Gibraltar Industries that we have uncovered.
If you’re unsure about the strength of Gibraltar Industries’ business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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.
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