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How Does Arcosa's (NYSE:ACA) P/E Compare To Its Industry, After Its Big Share Price Gain?

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Simply Wall St
·4 min read
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Arcosa (NYSE:ACA) shareholders are no doubt pleased to see that the share price has bounced 36% in the last month alone, although it is still down 11% over the last quarter. And the full year gain of 38% isn't too shabby, either!

Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. The implication here is that deep value investors might steer clear when expectations of a company are too high. Perhaps the simplest way to get a read on investors' expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.

View our latest analysis for Arcosa

Does Arcosa Have A Relatively High Or Low P/E For Its Industry?

Arcosa's P/E of 17.67 indicates some degree of optimism towards the stock. As you can see below, Arcosa has a higher P/E than the average company (12.2) in the construction industry.

NYSE:ACA Price Estimation Relative to Market April 18th 2020
NYSE:ACA Price Estimation Relative to Market April 18th 2020

That means that the market expects Arcosa will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

If earnings fall then in the future the 'E' will be lower. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

Arcosa's 51% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive. Regrettably, the longer term performance is poor, with EPS down per year over 3 years.

Remember: P/E Ratios Don't Consider The Balance Sheet

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

Arcosa's Balance Sheet

Since Arcosa holds net cash of US$136m, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Bottom Line On Arcosa's P/E Ratio

Arcosa has a P/E of 17.7. That's higher than the average in its market, which is 13.6. Its net cash position is the cherry on top of its superb EPS growth. To us, this is the sort of company that we would expect to carry an above average price tag (relative to earnings). What is very clear is that the market has become more optimistic about Arcosa over the last month, with the P/E ratio rising from 13.0 back then to 17.7 today. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.

Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

Of course you might be able to find a better stock than Arcosa. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.