Commercial Metals Company's (NYSE:CMC) price-to-earnings (or "P/E") ratio of 6.6x might make it look like a strong buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 17x and even P/E's above 33x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.
Recent times haven't been advantageous for Commercial Metals as its earnings have been falling quicker than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.
View our latest analysis for Commercial Metals
What Are Growth Metrics Telling Us About The Low P/E?
In order to justify its P/E ratio, Commercial Metals would need to produce anemic growth that's substantially trailing the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 27%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 215% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.
Looking ahead now, EPS is anticipated to slump, contracting by 25% during the coming year according to the seven analysts following the company. That's not great when the rest of the market is expected to grow by 10%.
With this information, we are not surprised that Commercial Metals is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.
What We Can Learn From Commercial Metals' P/E?
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 Commercial Metals' analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Commercial Metals that you should be aware of.
Of course, you might also be able to find a better stock than Commercial Metals. 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.