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Telephone and Data Systems, Inc.'s (NYSE:TDS) price-to-earnings (or "P/E") ratio of 14.3x 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 37x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
Telephone and Data Systems certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
Keen to find out how analysts think Telephone and Data Systems' future stacks up against the industry? In that case, our free report is a great place to start.
Is There Any Growth For Telephone and Data Systems?
The only time you'd be truly comfortable seeing a P/E as low as Telephone and Data Systems' is when the company's growth is on track to lag the market.
If we review the last year of earnings growth, the company posted a worthy increase of 4.6%. This was backed up an excellent period prior to see EPS up by 193% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Shifting to the future, estimates from the four analysts covering the company suggest earnings growth is heading into negative territory, declining 9.4% per year over the next three years. With the market predicted to deliver 13% growth per annum, that's a disappointing outcome.
With this information, we are not surprised that Telephone and Data Systems is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.
What We Can Learn From Telephone and Data Systems' P/E?
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
As we suspected, our examination of Telephone and Data Systems' analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
There are also other vital risk factors to consider and we've discovered 3 warning signs for Telephone and Data Systems (2 shouldn't be ignored!) that you should be aware of before investing here.
If these risks are making you reconsider your opinion on Telephone and Data Systems, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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