When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider AZZ Inc. (NYSE:AZZ) as a stock to potentially avoid with its 21.5x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.
Recent times have been pleasing for AZZ as its earnings have risen in spite of the market's earnings going into reverse. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.
How Is AZZ's Growth Trending?
The only time you'd be truly comfortable seeing a P/E as high as AZZ's is when the company's growth is on track to outshine the market.
If we review the last year of earnings growth, the company posted a terrific increase of 17%. The latest three year period has also seen an excellent 524% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 17% during the coming year according to the four analysts following the company. With the market only predicted to deliver 13%, the company is positioned for a stronger earnings result.
In light of this, it's understandable that AZZ's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Final Word
Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
We've established that AZZ maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.
Don't forget that there may be other risks. For instance, we've identified 1 warning sign for AZZ that you should be aware of.
Of course, you might also be able to find a better stock than AZZ. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
