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There wouldn't be many who think CSG Systems International, Inc.'s (NASDAQ:CSGS) price-to-earnings (or "P/E") ratio of 15.8x is worth a mention when the median P/E in the United States is similar at about 17x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.
Recent times have been advantageous for CSG Systems International 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 not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.
Does CSG Systems International Have A Relatively High Or Low P/E For Its Industry?
We'd like to see if P/E's within CSG Systems International's industry might provide some colour around the company's fairly average P/E ratio. You'll notice in the figure below that P/E ratios in the IT industry are significantly higher than the market. So unfortunately this doesn't provide much to explain the company's ratio at all right now. Some industry P/E's don't move around a lot and right now most companies within the IT industry should be getting a strong boost. We'd highlight though, the spotlight should be on the anticipated direction of the company's earnings.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on CSG Systems International.
What Are Growth Metrics Telling Us About The P/E?
In order to justify its P/E ratio, CSG Systems International would need to produce growth that's similar to the market.
Retrospectively, the last year delivered an exceptional 20% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 35% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Looking ahead now, EPS is anticipated to climb by 0.3% per year during the coming three years according to the three analysts following the company. Meanwhile, the rest of the market is forecast to expand by 9.3% each year, which is noticeably more attractive.
In light of this, it's curious that CSG Systems International's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.
What We Can Learn From CSG Systems International's P/E?
Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
We've established that CSG Systems International currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
Before you settle on your opinion, we've discovered 2 warning signs for CSG Systems International that you should be aware of.
If you're unsure about the strength of CSG Systems International's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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