CPFL Energia S.A.'s (BVMF:CPFE3) Share Price Is Matching Sentiment Around Its Earnings

CPFL Energia S.A.'s (BVMF:CPFE3) price-to-earnings (or "P/E") ratio of 7x might make it look like a buy right now compared to the market in Brazil, where around half of the companies have P/E ratios above 10x and even P/E's above 17x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

CPFL Energia could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for CPFL Energia

Keen to find out how analysts think CPFL Energia's future stacks up against the industry? In that case, our free report is a great place to start.

How Is CPFL Energia's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as CPFL Energia's is when the company's growth is on track to lag the market.

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 1.0%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 26% overall rise in EPS. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to slump, contracting by 2.8% each year during the coming three years according to the nine analysts following the company. That's not great when the rest of the market is expected to grow by 16% per annum.

In light of this, it's understandable that CPFL Energia's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Key Takeaway

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.

As we suspected, our examination of CPFL Energia's analyst forecasts revealed that its outlook for shrinking earnings 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. It's hard to see the share price rising strongly in the near future under these circumstances.

You need to take note of risks, for example - CPFL Energia has 3 warning signs (and 1 which is concerning) we think you should know about.

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 low P/E.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.