Alpha Metallurgical Resources, Inc.'s (NYSE:AMR) Share Price Boosted 33% But Its Business Prospects Need A Lift Too

Despite an already strong run, Alpha Metallurgical Resources, Inc. (NYSE:AMR) shares have been powering on, with a gain of 33% in the last thirty days. The annual gain comes to 131% following the latest surge, making investors sit up and take notice.

Even after such a large jump in price, Alpha Metallurgical Resources may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 6x, since almost half of all companies in the United States have P/E ratios greater than 17x and even P/E's higher than 33x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

With earnings that are retreating more than the market's of late, Alpha Metallurgical Resources has been very sluggish. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. You'd much rather the company wasn't bleeding earnings if you still believe in the business. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

Check out our latest analysis for Alpha Metallurgical Resources

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

What Are Growth Metrics Telling Us About The Low P/E?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 37%. 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.

Shifting to the future, estimates from the three analysts covering the company suggest earnings growth is heading into negative territory, declining 43% over the next year. That's not great when the rest of the market is expected to grow by 10%.

With this information, we are not surprised that Alpha Metallurgical Resources is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

Alpha Metallurgical Resources' recent share price jump still sees its P/E sitting firmly flat on the ground. 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.

We've established that Alpha Metallurgical Resources maintains its low P/E on the weakness of its forecast for sliding earnings, 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. It's hard to see the share price rising strongly in the near future under these circumstances.

It is also worth noting that we have found 2 warning signs for Alpha Metallurgical Resources (1 doesn't sit too well with us!) that you need to take into consideration.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.