When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 17x, you may consider Arcosa, Inc. (NYSE:ACA) as a stock to avoid entirely with its 30x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
Recent times haven't been advantageous for Arcosa as its earnings have been falling quicker 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.
Check out our latest analysis for Arcosa
How Is Arcosa's Growth Trending?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Arcosa's to be considered reasonable.
Retrospectively, the last year delivered a frustrating 50% decrease to the company's bottom line. Even so, admirably EPS has lifted 56% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.
Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 29% over the next year. Meanwhile, the rest of the market is forecast to only expand by 12%, which is noticeably less attractive.
With this information, we can see why Arcosa is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Bottom Line On Arcosa's P/E
It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
We've established that Arcosa maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.
You always need to take note of risks, for example - Arcosa has 2 warning signs we think you should be aware of.
If these risks are making you reconsider your opinion on Arcosa, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
About NYSE:ACA
Arcosa
Provides infrastructure-related products and solutions for the construction, engineered structures, and transportation markets in the United States.
Excellent balance sheet with reasonable growth potential.
