Reynolds Consumer Products Inc.'s (NASDAQ:REYN) Shares May Have Run Too Fast Too Soon

With a price-to-earnings (or "P/E") ratio of 21.5x Reynolds Consumer Products Inc. (NASDAQ:REYN) may be sending bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 16x and even P/E's lower than 8x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

Recent times have been advantageous for Reynolds Consumer Products as its earnings have been rising faster 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.

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Is There Enough Growth For Reynolds Consumer Products?

The only time you'd be truly comfortable seeing a P/E as high as Reynolds Consumer Products' is when the company's growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a worthy increase of 4.3%. Still, lamentably EPS has fallen 29% in aggregate from three years ago, which is disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 10% per year as estimated by the seven analysts watching the company. With the market predicted to deliver 13% growth each year, the company is positioned for a weaker earnings result.

In light of this, it's alarming that Reynolds Consumer Products' P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Reynolds Consumer Products' P/E

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Reynolds Consumer Products' analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

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

Of course, you might also be able to find a better stock than Reynolds Consumer Products. 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.