Enerplus Corporation's (TSE:ERF) Prospects Need A Boost To Lift Shares
With a price-to-earnings (or "P/E") ratio of 4.5x Enerplus Corporation (TSE:ERF) may be sending very bullish signals at the moment, given that almost half of all companies in Canada have P/E ratios greater than 13x and even P/E's higher than 27x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
With only a limited decrease in earnings compared to most other companies of late, Enerplus has been doing relatively well. One possibility is that the P/E is low because investors think this relatively better earnings performance might be about to deteriorate significantly. You'd much rather the company wasn't bleeding earnings if you still believe in the business. In saying that, existing shareholders probably aren't pessimistic about the share price if the company's earnings continue outplaying the market.
See our latest analysis for Enerplus
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Enerplus.
Does Growth Match The Low P/E?
The only time you'd be truly comfortable seeing a P/E as depressed as Enerplus' is when the company's growth is on track to lag the market decidedly.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 1.6%. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.
Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 18% as estimated by the three analysts watching the company. That's not great when the rest of the market is expected to grow by 12%.
In light of this, it's understandable that Enerplus' P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.
The Final Word
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.
As we suspected, our examination of Enerplus' analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.
We don't want to rain on the parade too much, but we did also find 2 warning signs for Enerplus that you need to be mindful of.
You might be able to find a better investment than Enerplus. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
