When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 17x, you may consider ArcBest Corporation (NASDAQ:ARCB) as a stock to potentially avoid with its 24.8x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.
ArcBest has been struggling lately as its earnings have declined faster than most other companies. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Is There Enough Growth For ArcBest?
The only time you'd be truly comfortable seeing a P/E as high as ArcBest's is when the company's growth is on track to outshine the market.
Retrospectively, the last year delivered a frustrating 51% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 116% in total over the last three years. 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 66% during the coming year according to the eleven analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 11%, which is noticeably less attractive.
With this information, we can see why ArcBest is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Bottom Line On ArcBest's P/E
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
We've established that ArcBest maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.
It is also worth noting that we have found 2 warning signs for ArcBest that you need to take into consideration.
If these risks are making you reconsider your opinion on ArcBest, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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.