With a median price-to-earnings (or "P/E") ratio of close to 17x in the United States, you could be forgiven for feeling indifferent about ONEOK, Inc.'s (NYSE:OKE) P/E ratio of 16.7x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.
With its earnings growth in positive territory compared to the declining earnings of most other companies, ONEOK has been doing quite well of late. One possibility is that the P/E is moderate because investors think the company's earnings will be less resilient moving forward. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.
View our latest analysis for ONEOK
How Is ONEOK's Growth Trending?
In order to justify its P/E ratio, ONEOK would need to produce growth that's similar to the market.
If we review the last year of earnings growth, the company posted a terrific increase of 51%. Pleasingly, EPS has also lifted 186% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Looking ahead now, EPS is anticipated to climb by 1.8% per year during the coming three years according to the nine analysts following the company. Meanwhile, the rest of the market is forecast to expand by 13% each year, which is noticeably more attractive.
With this information, we find it interesting that ONEOK is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.
What We Can Learn From ONEOK'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 ONEOK's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
Before you settle on your opinion, we've discovered 3 warning signs for ONEOK (1 makes us a bit uncomfortable!) that you should be aware of.
You might be able to find a better investment than ONEOK. 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.