Republic Services, Inc.'s (NYSE:RSG) Business Is Yet to Catch Up With Its Share Price

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 18x, you may consider Republic Services, Inc. (NYSE:RSG) as a stock to avoid entirely with its 33.1x 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 have been advantageous for Republic Services 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Republic Services

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Republic Services.

How Is Republic Services' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Republic Services' is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered an exceptional 21% gain to the company's bottom line. Pleasingly, EPS has also lifted 66% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 8.0% each year as estimated by the analysts watching the company. That's shaping up to be materially lower than the 11% per annum growth forecast for the broader market.

With this information, we find it concerning that Republic Services is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. 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 growth outlook.

The Final Word

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Republic Services currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you settle on your opinion, we've discovered 1 warning sign for Republic Services that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.