It’s not a stretch to say that Mueller Water Products, Inc.’s (NYSE:MWA) price-to-earnings (or “P/E”) ratio of 20x right now seems quite “middle-of-the-road” compared to the market in the United States, where the median P/E ratio is around 18x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
With its earnings growth in positive territory compared to the declining earnings of most other companies, Mueller Water Products has been doing quite well of late. It might be that many expect the strong earnings performance to deteriorate like the rest, which has kept the P/E from rising. If you like the company, you’d be hoping this isn’t the case so that you could potentially pick up some stock while it’s not quite in favour.free report is a great place to start.
Is There Some Growth For Mueller Water Products?
The only time you’d be comfortable seeing a P/E like Mueller Water Products’ is when the company’s growth is tracking the market closely.
If we review the last year of earnings growth, the company posted a terrific increase of 76%. The strong recent performance means it was also able to grow EPS by 61% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.
Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 3.8% as estimated by the nine analysts watching the company. With the market predicted to deliver 4.8% growth , that’s a disappointing outcome.
In light of this, it’s somewhat alarming that Mueller Water Products’ P/E sits in line with the majority of other companies. Apparently many investors in the company reject the analyst cohort’s pessimism and aren’t willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh on the share price eventually.
What We Can Learn From Mueller Water Products’ P/E?
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
Our examination of Mueller Water Products’ analyst forecasts revealed that its outlook for shrinking earnings isn’t impacting its P/E as much as we would have predicted. When we see a poor outlook with earnings heading backwards, we suspect share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it’s challenging to accept these prices as being reasonable.
You should always think about risks. Case in point, we’ve spotted 1 warning sign for Mueller Water Products you should be aware of.
If these risks are making you reconsider your opinion on Mueller Water Products, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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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