Valmont Industries, Inc.'s (NYSE:VMI) price-to-earnings (or "P/E") ratio of 31.6x might make it look like a strong sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 17x and even P/E's below 9x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
With earnings that are retreating more than the market's of late, Valmont Industries has been very sluggish. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.
What Are Growth Metrics Telling Us About The High P/E?
In order to justify its P/E ratio, Valmont Industries would need to produce outstanding growth well in excess of the market.
Retrospectively, the last year delivered a frustrating 42% decrease to the company's bottom line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 7.5% overall rise in EPS. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.
Turning to the outlook, the next year should generate growth of 105% as estimated by the six analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 11%, which is noticeably less attractive.
With this information, we can see why Valmont Industries is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
What We Can Learn From Valmont Industries' P/E?
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
As we suspected, our examination of Valmont Industries' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.
Before you settle on your opinion, we've discovered 3 warning signs for Valmont Industries that you should be aware of.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.
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