When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 18x, you may consider Arcos Dorados Holdings Inc. (NYSE:ARCO) as an attractive investment with its 12.6x 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 limited.
Arcos Dorados Holdings 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.
What Are Growth Metrics Telling Us About The Low P/E?
Arcos Dorados Holdings' P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.
If we review the last year of earnings growth, the company posted a worthy increase of 12%. Although, the latest three year period in total hasn't been as good as it didn't manage to provide any growth at all. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
Looking ahead now, EPS is anticipated to climb by 11% each year during the coming three years according to the six analysts following the company. With the market predicted to deliver 10% growth per annum, the company is positioned for a comparable earnings result.
In light of this, it's peculiar that Arcos Dorados Holdings' P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.
What We Can Learn From Arcos Dorados Holdings' P/E?
It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
Our examination of Arcos Dorados Holdings' analyst forecasts revealed that its market-matching earnings outlook isn't contributing to its P/E as much as we would have predicted. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.
Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Arcos Dorados Holdings (1 is a bit concerning) you should be aware of.
Of course, you might also be able to find a better stock than Arcos Dorados Holdings. 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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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.