AltaGas Ltd.'s (TSE:ALA) Price In Tune With Earnings

With a price-to-earnings (or "P/E") ratio of 21.3x AltaGas Ltd. (TSE:ALA) may be sending bearish signals at the moment, given that almost half of all companies in Canada have P/E ratios under 14x and even P/E's lower than 8x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

AltaGas hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. 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.

See our latest analysis for AltaGas

If you'd like to see what analysts are forecasting going forward, you should check out our free report on AltaGas.

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

In order to justify its P/E ratio, AltaGas would need to produce impressive growth in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 19%. Regardless, EPS has managed to lift by a handy 5.4% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 17% each year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 11% per annum, which is noticeably less attractive.

With this information, we can see why AltaGas is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On AltaGas' P/E

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.

As we suspected, our examination of AltaGas' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you take the next step, you should know about the 2 warning signs for AltaGas (1 is significant!) that we have uncovered.

You might be able to find a better investment than AltaGas. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.