Shareholders Should Be Pleased With PPL Corporation's (NYSE:PPL) Price

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 18x, you may consider PPL Corporation (NYSE:PPL) as a stock to potentially avoid with its 26.6x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

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Recent times have been advantageous for PPL as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for PPL

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

Is There Enough Growth For PPL?

In order to justify its P/E ratio, PPL would need to produce impressive growth in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 30%. Pleasingly, EPS has also lifted 1,050% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 17% each year during the coming three years according to the eleven analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 11% per annum, which is noticeably less attractive.

In light of this, it's understandable that PPL's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more 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.

We've established that PPL maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 2 warning signs for PPL (1 shouldn't be ignored!) that you need to be mindful of.

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.

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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.