It's not a stretch to say that New Jersey Resources Corporation's (NYSE:NJR) price-to-earnings (or "P/E") ratio of 18.7x 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. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
Recent times haven't been advantageous for New Jersey Resources as its earnings have been falling quicker than most other companies. It might be that many expect the dismal earnings performance to revert back to market averages soon, which has kept the P/E from falling. 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.
NYSE:NJR Price to Earnings Ratio vs Industry July 27th 2024 Keen to find out how analysts think New Jersey Resources' future stacks up against the industry? In that case, our free report is a great place to start.
Does Growth Match The P/E?
There's an inherent assumption that a company should be matching the market for P/E ratios like New Jersey Resources' to be considered reasonable.
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 16%. The last three years don't look nice either as the company has shrunk EPS by 1.0% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 8.0% per annum during the coming three years according to the four analysts following the company. That's shaping up to be materially lower than the 10% per annum growth forecast for the broader market.
With this information, we find it interesting that New Jersey Resources is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.
The Key Takeaway
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.
We've established that New Jersey Resources currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
Plus, you should also learn about these 3 warning signs we've spotted with New Jersey Resources (including 1 which is significant).
If these risks are making you reconsider your opinion on New Jersey Resources, explore our interactive list of high quality stocks to get an idea of what else is out there.
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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com