Terex Corporation's (NYSE:TEX) price-to-earnings (or "P/E") ratio of 8.1x might make it look like a strong buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 18x and even P/E's above 32x are quite common.  Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.  

Terex 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.    

NYSE:TEX Price to Earnings Ratio vs Industry May 14th 2024

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Terex.

What Are Growth Metrics Telling Us About The Low P/E?  

The only time you'd be truly comfortable seeing a P/E as depressed as Terex's is when the company's growth is on track to lag the market decidedly.  

Retrospectively, the last year delivered an exceptional 45% gain to the company's bottom line.   Pleasingly, EPS has also lifted 623% 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.  

Shifting to the future, estimates from the analysts covering the company suggest earnings growth is heading into negative territory, declining 1.3% per annum over the next three years.  With the market predicted to deliver 9.9% growth  each year, that's a disappointing outcome.

In light of this, it's understandable that Terex's P/E would sit below the majority of other companies.  Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse.  There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.  

The Bottom Line On Terex's P/E

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Terex maintains its low P/E on the weakness of its forecast for sliding earnings, as expected.  At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio.  It's hard to see the share price rising strongly in the near future under these circumstances.    

We don't want to rain on the parade too much, but we did also find 2 warning signs for Terex (1 doesn't sit too well with us!) that you need to be mindful of.  

Of course, you might also be able to find a better stock than Terex. 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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