Benign Growth For Ferguson plc (NYSE:FERG) Underpins Its Share Price

With a price-to-earnings (or "P/E") ratio of 12.2x Ferguson plc (NYSE:FERG) may be sending bullish signals at the moment, given that almost half of all companies in the United States have P/E ratios greater than 16x and even P/E's higher than 31x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Ferguson certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Ferguson

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

How Is Ferguson's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Ferguson's is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered a decent 9.7% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 138% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 0.9% per annum during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 9.7% per year growth forecast for the broader market.

With this information, we can see why Ferguson is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Ferguson maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you take the next step, you should know about the 2 warning signs for Ferguson that we have uncovered.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a P/E below 20x.

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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.