Getting In Cheap On Equifax Inc. (NYSE:EFX) Might Be Difficult

Equifax Inc.'s (NYSE:EFX) price-to-earnings (or "P/E") ratio of 57.9x might make it look like a strong sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 18x and even P/E's below 11x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Recent times have been advantageous for Equifax as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Equifax

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Is There Enough Growth For Equifax?

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

If we review the last year of earnings growth, the company posted a worthy increase of 7.1%. However, this wasn't enough as the latest three year period has seen an unpleasant 21% overall drop in EPS. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 33% per annum during the coming three years according to the analysts following the company. With the market only predicted to deliver 11% each year, the company is positioned for a stronger earnings result.

With this information, we can see why Equifax is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

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 Equifax 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 should always think about risks. Case in point, we've spotted 1 warning sign for Equifax you should be aware of.

You might be able to find a better investment than Equifax. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.