Why Investors Shouldn't Be Surprised By The Williams Companies, Inc.'s (NYSE:WMB) Low P/E

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 18x, you may consider The Williams Companies, Inc. (NYSE:WMB) as an attractive investment with its 14.5x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Williams Companies has been doing quite well of late. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Williams Companies

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

Is There Any Growth For Williams Companies?

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

Retrospectively, the last year delivered an exceptional 60% gain to the company's bottom line. Pleasingly, EPS has also lifted 1,467% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to slump, contracting by 4.1% per annum during the coming three years according to the nine analysts following the company. Meanwhile, the broader market is forecast to expand by 10% per annum, which paints a poor picture.

With this information, we are not surprised that Williams Companies is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Key Takeaway

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.

We've established that Williams Companies 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. It's hard to see the share price rising strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Williams Companies (1 shouldn't be ignored) you should be aware of.

Of course, you might also be able to find a better stock than Williams Companies. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.