ChampionX Corporation's (NASDAQ:CHX) P/E Is Still On The Mark Following 47% Share Price Bounce

The ChampionX Corporation (NASDAQ:CHX) share price has done very well over the last month, posting an excellent gain of 47%. Notwithstanding the latest gain, the annual share price return of 6.8% isn't as impressive.

After such a large jump in price, ChampionX may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 44x, since almost half of all companies in the United States have P/E ratios under 14x and even P/E's lower than 8x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

ChampionX certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

Our analysis indicates that CHX is potentially undervalued!

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

Does Growth Match The High P/E?

ChampionX's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered an exceptional 68% gain to the company's bottom line. Still, incredibly EPS has fallen 33% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 45% each year during the coming three years according to the ten analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 9.7% each year, which is noticeably less attractive.

With this information, we can see why ChampionX 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.

What We Can Learn From ChampionX's P/E?

The strong share price surge has got ChampionX's P/E rushing to great heights as well. 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.

As we suspected, our examination of ChampionX's 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.

We don't want to rain on the parade too much, but we did also find 2 warning signs for ChampionX that you need to be mindful of.

Of course, you might also be able to find a better stock than ChampionX. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.