NYSE:CAT) price-to-earnings (or “P/E”) ratio of 20.2x right now seems quite “middle-of-the-road” compared to the market in the United States, where the median P/E ratio is around 18x. Although, it’s not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.” data-reactid=”28″ type=”text”>It’s not a stretch to say that Caterpillar Inc.’s (NYSE:CAT) price-to-earnings (or “P/E”) ratio of 20.2x right now seems quite “middle-of-the-road” compared to the market in the United States, where the median P/E ratio is around 18x. Although, it’s not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.
With earnings that are retreating more than the market’s of late, Caterpillar has been very sluggish. One possibility is that the P/E is moderate because investors think the company’s earnings trend will eventually fall in line with most others in the market. If you still like the company, you’d want its earnings trajectory to turn around before making any decisions. Or at the very least, you’d be hoping it doesn’t keep underperforming if your plan is to pick up some stock while it’s not in favour.
free report on Caterpillar.” data-reactid=”47″ type=”text”>If you’d like to see what analysts are forecasting going forward, you should check out our free report on Caterpillar.
Does Growth Match The P/E?
Caterpillar’s P/E ratio would be typical for a company that’s only expected to deliver moderate growth, and importantly, perform in line with the market.
Retrospectively, the last year delivered a frustrating 31% decrease to the company’s bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 4,079% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.
Turning to the outlook, the next three years should generate growth of 15% each year as estimated by the analysts watching the company. That’s shaping up to be similar to the 13% per annum growth forecast for the broader market.
In light of this, it’s understandable that Caterpillar’s P/E sits in line with the majority of other companies. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.
The Key Takeaway
We’d say the price-to-earnings ratio’s power isn’t primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
As we suspected, our examination of Caterpillar’s analyst forecasts revealed that its market-matching earnings outlook is contributing to its current P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings won’t throw up any surprises. Unless these conditions change, they will continue to support the share price at these levels.
2 warning signs for Caterpillar (1 doesn’t sit too well with us!) that you need to be mindful of.” data-reactid=”56″ type=”text”>We don’t want to rain on the parade too much, but we did also find 2 warning signs for Caterpillar (1 doesn’t sit too well with us!) that you need to be mindful of.
our interactive list of high quality stocks to get an idea of what else is out there.” data-reactid=”57″ type=”text”>If these risks are making you reconsider your opinion on Caterpillar, 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.