Neoenergia S.A.'s (BVMF:NEOE3) Price Is Right But Growth Is Lacking

With a price-to-earnings (or "P/E") ratio of 10.3x Neoenergia S.A. (BVMF:NEOE3) may be sending bullish signals at the moment, given that almost half of all companies in Brazil have P/E ratios greater than 16x and even P/E's higher than 29x 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 limited.

With earnings growth that's superior to most other companies of late, Neoenergia has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Neoenergia

How Does Neoenergia's P/E Ratio Compare To Its Industry Peers?

It's plausible that Neoenergia's low P/E ratio could be a result of tendencies within its own industry. The image below shows that the Electric Utilities industry as a whole also has a P/E ratio lower than the market. So we'd say there is merit in the premise that the company's ratio being shaped by its industry at this time. Some industry P/E's don't move around a lot and right now most companies within the Electric Utilities industry should be getting stifled. However, what is happening on the company's own income statement is the most important factor to its P/E.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Neoenergia.

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Neoenergia would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 33% gain to the company's bottom line. Pleasingly, EPS has also lifted 459% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 5.5% per annum over the next three years. Meanwhile, the rest of the market is forecast to expand by 14% per year, which is noticeably more attractive.

In light of this, it's understandable that Neoenergia's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Neoenergia's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 2 warning signs for Neoenergia (1 is potentially serious!) that you need to take into consideration.

You might be able to find a better investment than Neoenergia. 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).

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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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