It's not a stretch to say that Xcel Energy Inc.'s (NASDAQ:XEL) price-to-earnings (or "P/E") ratio of 17.1x right now seems quite "middle-of-the-road" compared to the market in the United States, where the median P/E ratio is around 17x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
With its earnings growth in positive territory compared to the declining earnings of most other companies, Xcel Energy has been doing quite well of late. It might be that many expect the strong earnings performance to deteriorate like the rest, which has kept the P/E from rising. 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 not quite in favour.
Is There Some Growth For Xcel Energy?
In order to justify its P/E ratio, Xcel Energy would need to produce growth that's similar to the market.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 2.9% last year. EPS has also lifted 14% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.
Shifting to the future, estimates from the twelve analysts covering the company suggest earnings should grow by 7.9% per year over the next three years. That's shaping up to be materially lower than the 10% per year growth forecast for the broader market.
With this information, we find it interesting that Xcel Energy is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.
The Bottom Line On Xcel Energy'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.
We've established that Xcel Energy 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. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
Before you settle on your opinion, we've discovered 2 warning signs for Xcel Energy (1 is significant!) that you should be aware of.
If these risks are making you reconsider your opinion on Xcel Energy, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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.