Waste Connections, Inc. (NYSE:WCN) Not Lagging Market On Growth Or Pricing

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 17x, you may consider Waste Connections, Inc. (NYSE:WCN) as a stock to avoid entirely with its 54.7x 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 Waste Connections as its earnings have been falling quicker than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.

Check out our latest analysis for Waste Connections

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

Is There Enough Growth For Waste Connections?

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

Retrospectively, the last year delivered a frustrating 7.1% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 265% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Turning to the outlook, the next three years should generate growth of 25% per year as estimated by the analysts watching the company. That's shaping up to be materially higher than the 9.9% per year growth forecast for the broader market.

With this information, we can see why Waste Connections 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 Key Takeaway

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Waste Connections' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Waste Connections, and understanding these should be part of your investment process.

If you're unsure about the strength of Waste Connections' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.