With a price-to-earnings (or "P/E") ratio of 22.6x CenterPoint Energy, Inc. (NYSE:CNP) may be sending bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 16x and even P/E's lower than 8x are not unusual.  However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.  

While the market has experienced earnings growth lately, CenterPoint Energy's earnings have gone into reverse gear, which is not great.   One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner.  You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.    

See our latest analysis for CenterPoint Energy

NYSE:CNP Price to Earnings Ratio vs Industry January 16th 2024

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

Does Growth Match The High P/E?  

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 13%.   However, a few very strong years before that means that it was still able to grow EPS by an impressive 100% in total over the last three years.  So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.  

Turning to the outlook, the next three years should generate growth of 14%  per year as estimated by the eleven analysts watching the company.  That's shaping up to be similar to the 13% per year growth forecast for the broader market.

With this information, we find it interesting that CenterPoint Energy is trading at a high P/E compared to the market.  It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock.  These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.  

What We Can Learn From CenterPoint Energy's P/E?

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of CenterPoint Energy's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted.  Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long.  This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.    

Before you settle on your opinion, we've discovered 2 warning signs for CenterPoint Energy (1 can't be ignored!) that you should be aware of.  

If you're unsure about the strength of CenterPoint 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.