Unpleasant Surprises Could Be In Store For Stampede Drilling Inc.'s (CVE:SDI) Shares

There wouldn't be many who think Stampede Drilling Inc.'s (CVE:SDI) price-to-earnings (or "P/E") ratio of 12.7x is worth a mention when the median P/E in Canada is similar at about 11x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

With earnings growth that's exceedingly strong of late, Stampede Drilling has been doing very well. It might be that many expect the strong earnings performance to wane, 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.

Check out our latest analysis for Stampede Drilling

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Stampede Drilling will help you shine a light on its historical performance.

How Is Stampede Drilling's Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like Stampede Drilling's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 486%. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 5.0% shows it's noticeably less attractive on an annualised basis.

In light of this, it's curious that Stampede Drilling's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Final Word

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

We've established that Stampede Drilling currently trades on a higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 4 warning signs for Stampede Drilling (2 are concerning!) that we have uncovered.

If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.

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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.