With a price-to-earnings (or "P/E") ratio of 14.1x Arcos Dorados Holdings Inc. (NYSE:ARCO) may be sending bullish signals at the moment, given that almost half of all companies in the United States have P/E ratios greater than 17x and even P/E's higher than 33x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.
Arcos Dorados Holdings certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
Check out our latest analysis for Arcos Dorados Holdings
Is There Any Growth For Arcos Dorados Holdings?
In order to justify its P/E ratio, Arcos Dorados Holdings would need to produce sluggish growth that's trailing the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 37% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.
Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 1.5% over the next year. With the market predicted to deliver 10% growth , the company is positioned for a weaker earnings result.
In light of this, it's understandable that Arcos Dorados Holdings' P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.
The Key Takeaway
It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
We've established that Arcos Dorados Holdings maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. 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.
You should always think about risks. Case in point, we've spotted 2 warning signs for Arcos Dorados Holdings you should be aware of.
Of course, you might also be able to find a better stock than Arcos Dorados Holdings. 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.