When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider PPL Corporation (NYSE:PPL) as a stock to avoid entirely with its 25.9x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
PPL 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. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors' willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.
Check out our latest analysis for PPL
Does Growth Match The High P/E?
The only time you'd be truly comfortable seeing a P/E as steep as PPL's is when the company's growth is on track to outshine the market decidedly.
If we review the last year of earnings growth, the company posted a worthy increase of 9.4%. However, this wasn't enough as the latest three year period has seen an unpleasant 4.6% overall drop in EPS. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Looking ahead now, EPS is anticipated to climb by 22% per year during the coming three years according to the ten analysts following the company. That's shaping up to be materially higher than the 13% per annum growth forecast for the broader market.
With this information, we can see why PPL is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Final Word
Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
As we suspected, our examination of PPL's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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.
You always need to take note of risks, for example - PPL has 2 warning signs we think you should be aware of.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.