When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 19x, you may consider The Allstate Corporation (NYSE:ALL) as a highly attractive investment with its 7.2x 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 so limited.
Recent times have been pleasing for Allstate as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
Want the full picture on analyst estimates for the company? Then our free report on Allstate will help you uncover what's on the horizon.
Does Growth Match The Low P/E?
In order to justify its P/E ratio, Allstate would need to produce anemic growth that's substantially trailing the market.
Retrospectively, the last year delivered an exceptional 88% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 98% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.
Looking ahead now, EPS is anticipated to slump, contracting by 4.6% each year during the coming three years according to the eleven analysts following the company. That's not great when the rest of the market is expected to grow by 13% each year.
With this information, we are not surprised that Allstate is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.
The Bottom Line On Allstate'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 Allstate 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Allstate (1 shouldn't be ignored) you should be aware of.
You might be able to find a better investment than Allstate. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).
This article by Simply Wall St is general in nature. 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.
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