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When close to half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") above 18x, you may consider Stagecoach Group plc (LON:SGC) as a highly attractive investment with its 6.6x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
Recent times haven't been advantageous for Stagecoach Group as its earnings have been falling quicker than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. You'd much rather the company wasn't bleeding earnings if you still believe in the business. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.
Keen to find out how analysts think Stagecoach Group's future stacks up against the industry? In that case, our free report is a great place to start.
Does Growth Match The Low P/E?
Stagecoach Group's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.
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 62%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 21% overall rise in EPS. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.
Looking ahead now, EPS is anticipated to climb by 12% each year during the coming three years according to the seven analysts following the company. With the market predicted to deliver 15% growth each year, the company is positioned for a weaker earnings result.
In light of this, it's understandable that Stagecoach Group's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.
The Final Word
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 Stagecoach Group's analyst forecasts revealed that its inferior earnings outlook 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.
And what about other risks? Every company has them, and we've spotted 4 warning signs for Stagecoach Group (of which 1 shouldn't be ignored!) you should know about.
If you're unsure about the strength of Stagecoach Group'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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