Earnings Not Telling The Story For OGE Energy Corp. (NYSE:OGE)

With a median price-to-earnings (or "P/E") ratio of close to 18x in the United States, you could be forgiven for feeling indifferent about OGE Energy Corp.'s (NYSE:OGE) P/E ratio of 18.7x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

OGE Energy has been struggling lately as its earnings have declined faster than most other companies. It might be that many expect the dismal earnings performance to revert back to market averages soon, which has kept the P/E from falling. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for OGE Energy

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Does Growth Match The P/E?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 6.5%. Regardless, EPS has managed to lift by a handy 6.8% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Turning to the outlook, the next three years should generate growth of 7.2% per annum as estimated by the seven analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 10% each year, which is noticeably more attractive.

With this information, we find it interesting that OGE Energy 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

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 OGE Energy's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. 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.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for OGE Energy (1 is a bit unpleasant) you should be aware of.

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

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