Why We're Not Concerned About Shaw Communications Inc.'s (TSE:SJR.B) Share Price

When close to half the companies in Canada have price-to-earnings ratios (or "P/E's") below 14x, you may consider Shaw Communications Inc. (TSE:SJR.B) as a stock to potentially avoid with its 18.4x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's lofty.

While the market has experienced earnings growth lately, Shaw Communications' earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

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What Are Growth Metrics Telling Us About The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like Shaw Communications' to be considered reasonable.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 12%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 13% in total. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Turning to the outlook, the next year should demonstrate the company's robustness, generating growth of 2.4% as estimated by the twelve analysts watching the company. With the rest of the market predicted to shrink by 4.4%, that would be a fantastic result.

In light of this, it's understandable that Shaw Communications' P/E sits above the majority of other companies. At this time, shareholders aren't keen to offload something that is potentially eyeing a much more prosperous future.

The Final Word

The price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Shaw Communications' analyst forecasts revealed that its superior earnings outlook against a shaky market 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. Our only concern is whether its earnings trajectory can keep outperforming under these tough market conditions. Otherwise, it's hard to see the share price falling strongly in the near future under the current growth expectations.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Shaw Communications, and understanding them should be part of your investment process.

If you're unsure about the strength of Shaw Communications' 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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