Unpleasant Surprises Could Be In Store For Canadian Utilities Limited's (TSE:CU) Shares

There wouldn't be many who think Canadian Utilities Limited's (TSE:CU) price-to-earnings (or "P/E") ratio of 14.8x is worth a mention when the median P/E in Canada is similar at about 13x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Canadian Utilities has been doing a reasonable job lately as its earnings haven't declined as much as most other companies. It might be that many expect the comparatively superior earnings performance to vanish, which has kept the P/E from rising. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. But at the very least, you'd be hoping the company doesn't fall back into the pack if your plan is to pick up some stock while it's not in favour.

See our latest analysis for Canadian Utilities

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

How Is Canadian Utilities' Growth Trending?

The only time you'd be comfortable seeing a P/E like Canadian Utilities' is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. Although pleasingly EPS has lifted 46% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 4.3% over the next year. With the market predicted to deliver 13% growth , the company is positioned for a weaker earnings result.

With this information, we find it interesting that Canadian Utilities is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

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.

Our examination of Canadian Utilities' analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Canadian Utilities (of which 1 can't be ignored!) you should know about.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.