Arrow Electronics, Inc.'s (NYSE:ARW) Shares Lagging The Market But So Is The Business

With a price-to-earnings (or "P/E") ratio of 7.7x Arrow Electronics, Inc. (NYSE:ARW) may be sending very bullish signals at the moment, given that almost half of all companies in the United States have P/E ratios greater than 18x 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.

Recent times haven't been advantageous for Arrow Electronics as its earnings have been falling quicker than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Check out our latest analysis for Arrow Electronics

Keen to find out how analysts think Arrow Electronics' future stacks up against the industry? In that case, our free report is a great place to start.

How Is Arrow Electronics' Growth Trending?

In order to justify its P/E ratio, Arrow Electronics would need to produce anemic growth that's substantially trailing the market.

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 27%. Even so, admirably EPS has lifted 123% 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.

Shifting to the future, estimates from the eight analysts covering the company suggest earnings growth is heading into negative territory, declining 39% over the next year. That's not great when the rest of the market is expected to grow by 11%.

With this information, we are not surprised that Arrow Electronics 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 Final Word

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.

We've established that Arrow Electronics 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you settle on your opinion, we've discovered 3 warning signs for Arrow Electronics (2 are significant!) that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.