It's not a stretch to say that Cogeco Communications Inc.'s (TSE:CCA) price-to-earnings (or "P/E") ratio of 13.7x right now seems quite "middle-of-the-road" compared to the market in Canada, where the median P/E ratio is around 15x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
Recent times have been advantageous for Cogeco Communications as its earnings have been rising faster 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.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Cogeco Communications.
Is There Some Growth For Cogeco Communications?
The only time you'd be comfortable seeing a P/E like Cogeco Communications' is when the company's growth is tracking the market closely.
Taking a look back first, we see that the company grew earnings per share by an impressive 16% last year. The latest three year period has also seen a 24% overall rise in EPS, aided extensively by its short-term performance. Therefore, it's fair to say the earnings growth recently has been respectable for the company.
Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 0.4% over the next year. That's shaping up to be similar to the 1.5% growth forecast for the broader market.
With this information, we can see why Cogeco Communications is trading at a fairly similar P/E to the market. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.
What We Can Learn From Cogeco Communications' 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 Cogeco Communications maintains its moderate P/E off the back of its forecast growth being in line with the wider market, as expected. At this stage investors feel the potential for an improvement or deterioration in earnings isn't great enough to justify a high or low P/E ratio. It's hard to see the share price moving strongly in either direction in the near future under these circumstances.
Plus, you should also learn about these 3 warning signs we've spotted with Cogeco Communications (including 2 which are concerning).
You might be able to find a better investment than Cogeco Communications. 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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