When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 18x, you may consider Teekay Tankers Ltd. (NYSE:TNK) as a highly attractive investment with its 3.8x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
Teekay Tankers 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. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
What Are Growth Metrics Telling Us About The Low P/E?
In order to justify its P/E ratio, Teekay Tankers would need to produce anemic growth that's substantially trailing the market.
Retrospectively, the last year delivered an exceptional 123% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 482% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.
Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 9.4% per annum as estimated by the five analysts watching the company. With the market predicted to deliver 11% growth per year, that's a disappointing outcome.
With this information, we are not surprised that Teekay Tankers is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.
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 Teekay Tankers' analyst forecasts revealed that its outlook for shrinking earnings 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. It's hard to see the share price rising strongly in the near future under these circumstances.
Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Teekay Tankers (1 is a bit unpleasant) you should be aware of.
You might be able to find a better investment than Teekay Tankers. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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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.