With a price-to-earnings (or “P/E”) ratio of 12.8x Verizon Communications Inc. (NYSE:VZ) may be sending bullish signals at the moment, given that almost half of all companies in the United States have P/E ratios greater than 19x and even P/E’s higher than 38x are not unusual. Although, it’s not wise to just take the P/E at face value as there may be an explanation why it’s limited.
Verizon Communications 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. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. 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 Verizon Communications’ future stacks up against the industry? In that case, our free report is a great place to start.
What Are Growth Metrics Telling Us About The Low P/E?
There’s an inherent assumption that a company should underperform the market for P/E ratios like Verizon Communications’ to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 21% last year. As a result, it also grew EPS by 19% in total over the last three years. Therefore, it’s fair to say the earnings growth recently has been respectable for the company.
Looking ahead now, EPS is anticipated to climb by 3.9% per year during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to expand by 14% each year, which is noticeably more attractive.
With this information, we can see why Verizon Communications is trading at a P/E lower than the market. 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
Using the price-to-earnings ratio alone to determine if you should sell your stock isn’t sensible, however it can be a practical guide to the company’s future prospects.
As we suspected, our examination of Verizon Communications’ 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
We don’t want to rain on the parade too much, but we did also find 1 warning sign for Verizon Communications that you need to be mindful of.
Of course, you might also be able to find a better stock than Verizon Communications. So you may wish to see this free collection of other companies that sit on P/E’s below 20x and have grown earnings strongly.
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.