When close to half the companies in Canada have price-to-earnings ratios (or "P/E's") above 16x, you may consider ARC Resources Ltd. (TSE:ARX) as an attractive investment with its 11.7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
With earnings that are retreating more than the market's of late, ARC Resources has been very sluggish. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.
Check out our latest analysis for ARC Resources
Is There Any Growth For ARC Resources?
The only time you'd be truly comfortable seeing a P/E as low as ARC Resources' is when the company's growth is on track to lag the market.
Retrospectively, the last year delivered a frustrating 50% 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 702% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.
Turning to the outlook, the next three years should generate growth of 9.2% per year as estimated by the three analysts watching the company. That's shaping up to be similar to the 10% per year growth forecast for the broader market.
In light of this, it's peculiar that ARC Resources' P/E sits below the majority of other companies. It may be that most investors are not convinced the company can achieve future growth expectations.
The Key Takeaway
It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
We've established that ARC Resources currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.
You always need to take note of risks, for example - ARC Resources has 2 warning signs we think you should be aware of.
If these risks are making you reconsider your opinion on ARC Resources, 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. 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.
About TSX:ARX
ARC Resources
Engages in the acquiring and developing crude oil, natural gas, condensate, and natural gas liquids in Canada.
Undervalued with adequate balance sheet.
