Some Confidence Is Lacking In Avangrid, Inc.'s (NYSE:AGR) P/E

There wouldn't be many who think Avangrid, Inc.'s (NYSE:AGR) price-to-earnings (or "P/E") ratio of 15.4x is worth a mention when the median P/E in the United States is similar at about 17x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Recent times have been pleasing for Avangrid as its earnings have risen in spite of the market's earnings going into reverse. One possibility is that the P/E is moderate because investors think the company's earnings will be less resilient moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

See our latest analysis for Avangrid

Want the full picture on analyst estimates for the company? Then our free report on Avangrid will help you uncover what's on the horizon.

Is There Some Growth For Avangrid?

The only time you'd be comfortable seeing a P/E like Avangrid's is when the company's growth is tracking the market closely.

Taking a look back first, we see that the company grew earnings per share by an impressive 31% last year. The latest three year period has also seen a 5.7% overall rise in EPS, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 3.3% per annum over the next three years. That's shaping up to be materially lower than the 10% per year growth forecast for the broader market.

With this information, we find it interesting that Avangrid is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Final Word

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 Avangrid currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Having said that, be aware Avangrid is showing 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com