With a median price-to-earnings (or “P/E”) ratio of close to 17x in Canada, you could be forgiven for feeling indifferent about Pembina Pipeline Corporation’s (TSE:PPL) P/E ratio of 18.2x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
Pembina Pipeline hasn’t been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is moderate because investors think this poor earnings performance will turn around. You’d really hope so, otherwise you’re paying a relatively elevated price for a company with this sort of growth profile.free report is a great place to start.
Does Growth Match The P/E?
In order to justify its P/E ratio, Pembina Pipeline would need to produce growth that’s similar to the market.
Retrospectively, the last year delivered a frustrating 42% decrease to the company’s bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 41% in total over the last three years. Although it’s been a bumpy ride, it’s still fair to say the earnings growth recently has been more than adequate for the company.
Turning to the outlook, the next three years should generate growth of 10% per year as estimated by the ten analysts watching the company. With the market predicted to deliver 25% growth per year, the company is positioned for a weaker earnings result.
With this information, we find it interesting that Pembina Pipeline is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren’t willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.
The Final Word
Using the price-to-earnings ratio alone to determine if you should sell your stock isn’t sensible, however it can be a practical guide to the company’s future prospects.
We’ve established that Pembina Pipeline currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren’t likely to support a more positive sentiment for long. This places shareholders’ investments at risk and potential investors in danger of paying an unnecessary premium.
There are also other vital risk factors to consider and we’ve discovered 3 warning signs for Pembina Pipeline (1 is significant!) that you should be aware of before investing here.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a P/E below 20x.
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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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