Investors Appear Satisfied With AltaGas Ltd.'s (TSE:ALA) Prospects

AltaGas Ltd.'s (TSE:ALA) price-to-earnings (or "P/E") ratio of 20.2x might make it look like a sell right now compared to the market in Canada, where around half of the companies have P/E ratios below 14x and even P/E's below 7x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

AltaGas has been struggling lately as its earnings have declined faster than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View 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.

Is There Enough Growth For AltaGas?

AltaGas' P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than 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. 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.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 18% each year over the next three years. With the market only predicted to deliver 9.0% each year, the company is positioned for a stronger earnings result.

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.

We've established that AltaGas maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 4 warning signs for AltaGas (1 can't be ignored!) that you should be aware of.

Of course, you might also be able to find a better stock than AltaGas. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.