Investors Aren't Buying SM Energy Company's (NYSE:SM) Earnings

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 19x, you may consider SM Energy Company (NYSE:SM) as a highly attractive investment with its 5.6x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

SM Energy hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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Is There Any Growth For SM Energy?

The only time you'd be truly comfortable seeing a P/E as depressed as SM Energy's is when the company's growth is on track to lag the market decidedly.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 2.6%. Still, the latest three year period has seen an excellent 2,087% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Looking ahead now, EPS is anticipated to climb by 5.8% during the coming year according to the twelve analysts following the company. Meanwhile, the rest of the market is forecast to expand by 14%, which is noticeably more attractive.

With this information, we can see why SM Energy is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

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.

We've established that SM Energy maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with SM Energy (at least 1 which makes us a bit uncomfortable), and understanding them should be part of your investment process.

If you're unsure about the strength of SM Energy's 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.