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Texas Pacific Land Corporation's (NYSE:TPL) 27% Price Boost Is Out Of Tune With Earnings

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Simply Wall St
·4 min read
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Texas Pacific Land Corporation (NYSE:TPL) shares have continued their recent momentum with a 27% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 31%.

Since its price has surged higher, given close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 21x, you may consider Texas Pacific Land as a stock to avoid entirely with its 39.5x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Texas Pacific Land could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Texas Pacific Land

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If you'd like to see what analysts are forecasting going forward, you should check out our free report on Texas Pacific Land.

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Texas Pacific Land would need to produce outstanding growth well in excess of 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 36%. Even so, admirably EPS has lifted 144% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 4.6% over the next year. Meanwhile, the rest of the market is forecast to expand by 18%, which is noticeably more attractive.

With this information, we find it concerning that Texas Pacific Land is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

Texas Pacific Land's P/E is flying high just like its stock has during the last month. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Texas Pacific Land's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Texas Pacific Land that you should be aware of.

If these risks are making you reconsider your opinion on Texas Pacific Land, 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.