It's not a stretch to say that Carlisle Companies Incorporated's (NYSE:CSL) price-to-earnings (or "P/E") ratio of 15.2x right now seems quite "middle-of-the-road" compared to the market in the United States, where the median P/E ratio is around 17x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
Carlisle Companies certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. 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 not quite in favour.
Where Does Carlisle Companies' P/E Sit Within Its Industry?
An inspection of the typical P/E's throughout Carlisle Companies' industry may help to explain its fairly average P/E ratio. The image below shows that the Industrials industry as a whole also has a P/E ratio similar to the market. So we'd say there is merit in the premise that the company's ratio being shaped by its industry at this time. Ordinarily, the majority of companies' P/E's would be constrained by the general conditions within the Industrials industry. 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 Carlisle Companies will help you uncover what's on the horizon.
How Is Carlisle Companies' Growth Trending?
In order to justify its P/E ratio, Carlisle Companies would need to produce growth that's similar to the market.
If we review the last year of earnings growth, the company posted a terrific increase of 27%. Pleasingly, EPS has also lifted 118% in aggregate from three years ago, thanks to the last 12 months of growth. 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 5.3% per year as estimated by the eight analysts watching the company. With the market predicted to deliver 10.0% growth each year, the company is positioned for a weaker earnings result.
With this information, we find it interesting that Carlisle Companies is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.
The Key Takeaway
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 Carlisle Companies currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Carlisle Companies that you should be aware of.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).
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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