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With a price-to-earnings (or "P/E") ratio of 29.9x Ameresco, Inc. (NYSE:AMRC) may be sending very bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 16x and even P/E's lower than 9x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.
With earnings growth that's superior to most other companies of late, Ameresco has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.
Does Ameresco Have A Relatively High Or Low P/E For Its Industry?
An inspection of average P/E's throughout Ameresco's industry may help to explain its particularly high P/E ratio. The image below shows that the Construction industry as a whole has a P/E ratio lower than the market. So unfortunately this doesn't provide much to explain the company's ratio at all right now. In the context of the Construction industry's current setting, most of its constituents' P/E's would be expected to be toned down. However, what is happening on the company's own income statement is the most important factor to its P/E.
Want the full picture on analyst estimates for the company? Then our free report on Ameresco will help you uncover what's on the horizon.
How Is Ameresco's Growth Trending?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Ameresco's to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 30% last year. The latest three year period has also seen an excellent 343% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.
Turning to the outlook, the next three years should generate growth of 6.3% per year as estimated by the six analysts watching the company. That's shaping up to be materially lower than the 10.0% per annum growth forecast for the broader market.
With this information, we find it concerning that Ameresco is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.
The Bottom Line On Ameresco's P/E
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
Our examination of Ameresco's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.
It is also worth noting that we have found 4 warning signs for Ameresco (2 are concerning!) that you need to take into consideration.
Of course, you might also be able to find a better stock than Ameresco. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.
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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