When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 17x, you may consider Old Dominion Freight Line, Inc. (NASDAQ:ODFL) as a stock to avoid entirely with its 31.7x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
Recent times haven't been advantageous for Old Dominion Freight Line as its earnings have been falling quicker than most other companies. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
How Is Old Dominion Freight Line's Growth Trending?
In order to justify its P/E ratio, Old Dominion Freight Line would need to produce outstanding growth well in excess of the market.
Retrospectively, the last year delivered a frustrating 6.7% 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 82% 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.
Looking ahead now, EPS is anticipated to climb by 13% per year during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 9.9% per year, which is noticeably less attractive.
In light of this, it's understandable that Old Dominion Freight Line's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
What We Can Learn From Old Dominion Freight Line's P/E?
It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
As we suspected, our examination of Old Dominion Freight Line's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.
You always need to take note of risks, for example - Old Dominion Freight Line has 1 warning sign we think you should be aware of.
If you're unsure about the strength of Old Dominion Freight Line's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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.