MGE Energy, Inc.'s (NASDAQ:MGEE) Business Is Trailing The Market But Its Shares Aren't

With a price-to-earnings (or "P/E") ratio of 22x MGE Energy, Inc. (NASDAQ:MGEE) 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 9x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, MGE Energy has been doing quite well of late. 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.

See our latest analysis for MGE Energy

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

Is There Enough Growth For MGE Energy?

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

If we review the last year of earnings growth, the company posted a terrific increase of 15%. EPS has also lifted 24% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 2.7% as estimated by the dual analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 10%, which is noticeably more attractive.

With this information, we find it concerning that MGE Energy is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. 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.

What We Can Learn From MGE Energy's P/E?

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of MGE Energy's 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. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

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

If you're unsure about the strength of MGE Energy's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.