When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 19x, you may consider Keurig Dr Pepper Inc. (NYSE:KDP) as a stock to avoid entirely with its 36x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
Recent times have been pleasing for Keurig Dr Pepper as its earnings have risen in spite of the market's earnings going into reverse. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.free report on Keurig Dr Pepper will help you uncover what's on the horizon.
What Are Growth Metrics Telling Us About The High P/E?
The only time you'd be truly comfortable seeing a P/E as steep as Keurig Dr Pepper's is when the company's growth is on track to outshine the market decidedly.
Retrospectively, the last year delivered an exceptional 20% gain to the company's bottom line. The latest three year period has also seen an excellent 73% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 28% per year over the next three years. With the market only predicted to deliver 14% each year, the company is positioned for a stronger earnings result.
With this information, we can see why Keurig Dr Pepper 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.
The Bottom Line On Keurig Dr Pepper's P/E
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
As we suspected, our examination of Keurig Dr Pepper'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.
Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Keurig Dr Pepper (1 makes us a bit uncomfortable) you should be aware of.
You might be able to find a better investment than Keurig Dr Pepper. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).
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This article by Simply Wall St is general in nature. 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.
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