When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider Expeditors International of Washington, Inc. (NYSE:EXPD) as a stock to potentially avoid with its 22.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.
With earnings that are retreating more than the market's of late, Expeditors International of Washington has been very sluggish. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.
View our latest analysis for Expeditors International of Washington
What Are Growth Metrics Telling Us About The High P/E?
Expeditors International of Washington's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 44%. Even so, admirably EPS has lifted 49% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 2.4% per year during the coming three years according to the analysts following the company. With the market predicted to deliver 13% growth per year, the company is positioned for a weaker earnings result.
With this information, we find it concerning that Expeditors International of Washington is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.
What We Can Learn From Expeditors International of Washington'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 Expeditors International of Washington's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near 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 high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.
There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Expeditors International of Washington that you should be aware of.
You might be able to find a better investment than Expeditors International of Washington. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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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.