With a median price-to-earnings (or "P/E") ratio of close to 18x in the United States, you could be forgiven for feeling indifferent about DT Midstream, Inc.'s (NYSE:DTM) P/E ratio of 18.1x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.
With its earnings growth in positive territory compared to the declining earnings of most other companies, DT Midstream has been doing quite well of late. One possibility is that the P/E is moderate because investors think the company's earnings will be less resilient moving forward. 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.
Does Growth Match The P/E?
DT Midstream's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.
If we review the last year of earnings growth, the company posted a worthy increase of 9.2%. The latest three year period has also seen a 28% overall rise in EPS, aided somewhat by its short-term performance. Therefore, it's fair to say the earnings growth recently has been respectable for the company.
Turning to the outlook, the next three years should generate growth of 4.0% each year as estimated by the seven analysts watching the company. With the market predicted to deliver 10% growth each year, the company is positioned for a weaker earnings result.
In light of this, it's curious that DT Midstream's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.
What We Can Learn From DT Midstream's P/E?
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.
Our examination of DT Midstream's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
Having said that, be aware DT Midstream is showing 2 warning signs in our investment analysis, you should know about.
Of course, you might also be able to find a better stock than DT Midstream. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.
