Even With A 25% Surge Cautious Investors Are Not Rewarding Seplat Petroleum Development Company Plc's (LON:SEPL) Performance Completely

By
Simply Wall St
Published
September 19, 2020
LSE:SEPL

Seplat Petroleum Development Company Plc (LON:SEPL) shares have had a really impressive month, gaining 25% after a shaky period beforehand. But not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 43% in the last twelve months.

Even after such a large jump in price, Seplat Petroleum Development may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 7.6x, since almost half of all companies in the United Kingdom have P/E ratios greater than 18x and even P/E's higher than 37x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Recent times haven't been advantageous for Seplat Petroleum Development as its earnings have been falling quicker than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. You'd much rather the company wasn't bleeding earnings if you still believe in the business. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

Check out our latest analysis for Seplat Petroleum Development

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LSE:SEPL Price Based on Past Earnings September 19th 2020
Keen to find out how analysts think Seplat Petroleum Development's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Seplat Petroleum Development's Growth Trending?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Seplat Petroleum Development's to be considered reasonable.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 72%. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Looking ahead now, EPS is anticipated to climb by 31% each year during the coming three years according to the six analysts following the company. With the market only predicted to deliver 16% per annum, the company is positioned for a stronger earnings result.

With this information, we find it odd that Seplat Petroleum Development is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Bottom Line On Seplat Petroleum Development's P/E

Seplat Petroleum Development's recent share price jump still sees its P/E sitting firmly flat on the ground. 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 Seplat Petroleum Development's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

And what about other risks? Every company has them, and we've spotted 5 warning signs for Seplat Petroleum Development you should know about.

Of course, you might also be able to find a better stock than Seplat Petroleum Development. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.

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This article by Simply Wall St is general in nature. 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.
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