Atmos Energy Corporation's (NYSE:ATO) Business Is Yet to Catch Up With Its Share Price

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 17x, you may consider Atmos Energy Corporation (NYSE:ATO) as a stock to potentially avoid with its 21.3x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Atmos Energy certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. 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 Atmos Energy

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

Is There Enough Growth For Atmos Energy?

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

Retrospectively, the last year delivered an exceptional 16% gain to the company's bottom line. The latest three year period has also seen a 24% overall rise in EPS, aided extensively by its short-term performance. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Shifting to the future, estimates from the ten analysts covering the company suggest earnings should grow by 5.9% per annum over the next three years. With the market predicted to deliver 11% growth each year, the company is positioned for a weaker earnings result.

With this information, we find it concerning that Atmos Energy is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

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.

Our examination of Atmos 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.

It is also worth noting that we have found 3 warning signs for Atmos Energy that you need to take into consideration.

If you're unsure about the strength of Atmos 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.