Liberty Energy Inc.'s (NYSE:LBRT) Shares Lagging The Market But So Is The Business

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 19x, you may consider Liberty Energy Inc. (NYSE:LBRT) as a highly attractive investment with its 8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

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While the market has experienced earnings growth lately, Liberty Energy's earnings have gone into reverse gear, which is not great. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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Is There Any Growth For Liberty Energy?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 45%. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 11% each year as estimated by the twelve analysts watching the company. That's not great when the rest of the market is expected to grow by 10% per annum.

In light of this, it's understandable that Liberty Energy's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

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 Liberty Energy maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you take the next step, you should know about the 4 warning signs for Liberty Energy (1 shouldn't be ignored!) that we have uncovered.

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.