Cautious Investors Not Rewarding New Jersey Resources Corporation's (NYSE:NJR) Performance Completely
New Jersey Resources Corporation's (NYSE:NJR) price-to-earnings (or "P/E") ratio of 16.1x might make it look like a buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 19x and even P/E's above 36x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Recent times have been pleasing for New Jersey Resources 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 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.
Check out our latest analysis for New Jersey Resources
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Does Growth Match The Low P/E?
The only time you'd be truly comfortable seeing a P/E as low as New Jersey Resources' is when the company's growth is on track to lag the market.
Retrospectively, the last year delivered an exceptional 19% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 20% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 15% per year over the next three years. That's shaping up to be similar to the 13% per annum growth forecast for the broader market.
In light of this, it's peculiar that New Jersey Resources' P/E sits below the majority of other companies. It may be that most investors are not convinced the company can achieve future growth expectations.
What We Can Learn From New Jersey Resources' 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 New Jersey Resources currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.
Don't forget that there may be other risks. For instance, we've identified 3 warning signs for New Jersey Resources (1 is potentially serious) you should be aware of.
Of course, you might also be able to find a better stock than New Jersey Resources. 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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