Southern Copper Corporation's (NYSE:SCCO) 30% Price Boost Is Out Of Tune With Earnings

Southern Copper Corporation (NYSE:SCCO) shares have had a really impressive month, gaining 30% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 38%.

Following the firm bounce in price, Southern Copper may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 33.3x, since almost half of all companies in the United States have P/E ratios under 17x and even P/E's lower than 9x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Southern Copper has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.

View our latest analysis for Southern Copper

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

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

There's an inherent assumption that a company should far outperform the market for P/E ratios like Southern Copper's to be considered reasonable.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 8.1%. Even so, admirably EPS has lifted 54% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 9.2% per annum during the coming three years according to the analysts following the company. That's shaping up to be similar to the 10% per year growth forecast for the broader market.

In light of this, it's curious that Southern Copper's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Southern Copper's P/E

The strong share price surge has got Southern Copper's P/E rushing to great heights as well. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Southern Copper currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 2 warning signs for Southern Copper (1 shouldn't be ignored!) that you should be aware of.

Of course, you might also be able to find a better stock than Southern Copper. 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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