Earnings Not Telling The Story For Trinity Industries, Inc. (NYSE:TRN)

It's not a stretch to say that Trinity Industries, Inc.'s (NYSE:TRN) price-to-earnings (or "P/E") ratio of 17.8x right now seems quite "middle-of-the-road" compared to the market in the United States, where the median P/E ratio is around 17x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Recent times have been pleasing for Trinity Industries as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to deteriorate like the rest, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Check out our latest analysis for Trinity Industries

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Is There Some Growth For Trinity Industries?

In order to justify its P/E ratio, Trinity Industries would need to produce growth that's similar to the market.

Retrospectively, the last year delivered an exceptional 40% gain to the company's bottom line. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, EPS is anticipated to slump, contracting by 4.8% during the coming year according to the three analysts following the company. With the market predicted to deliver 12% growth , that's a disappointing outcome.

With this information, we find it concerning that Trinity Industries is trading at a fairly similar P/E to the market. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

The Final Word

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 Trinity Industries currently trades on a higher than expected P/E for a company whose earnings are forecast to decline. When we see a poor outlook with earnings heading backwards, we suspect share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you settle on your opinion, we've discovered 4 warning signs for Trinity Industries (1 is significant!) that you should be aware of.

If these risks are making you reconsider your opinion on Trinity Industries, 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.