Investors Appear Satisfied With FirstEnergy Corp.'s (NYSE:FE) Prospects

It's not a stretch to say that FirstEnergy Corp.'s (NYSE:FE) price-to-earnings (or "P/E") ratio of 20x right now seems quite "middle-of-the-road" compared to the market in the United States, where the median P/E ratio is around 19x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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With earnings growth that's superior to most other companies of late, FirstEnergy has been doing relatively well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

View our latest analysis for FirstEnergy

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

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

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

If we review the last year of earnings growth, the company posted a terrific increase of 46%. However, this wasn't enough as the latest three year period has seen a very unpleasant 4.2% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 9.8% per year during the coming three years according to the nine analysts following the company. Meanwhile, the rest of the market is forecast to expand by 11% per annum, which is not materially different.

With this information, we can see why FirstEnergy is trading at a fairly similar P/E to the market. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.

The Key Takeaway

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of FirstEnergy's analyst forecasts revealed that its market-matching earnings outlook is contributing to its current P/E. At this stage investors feel the potential for an improvement or deterioration in earnings isn't great enough to justify a high or low P/E ratio. Unless these conditions change, they will continue to support the share price at these levels.

You need to take note of risks, for example - FirstEnergy has 2 warning signs (and 1 which can't be ignored) we think you should know about.

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