Despite an already strong run, Texas Pacific Land Corporation (NYSE:TPL) shares have been powering on, with a gain of 28% in the last thirty days. The annual gain comes to 182% following the latest surge, making investors sit up and take notice.
Following the firm bounce in price, given close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 19x, you may consider Texas Pacific Land as a stock to avoid entirely with its 76.8x 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.
Texas Pacific Land has been doing a good job lately as it's been growing earnings at a solid pace. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
What Are Growth Metrics Telling Us About The High P/E?
In order to justify its P/E ratio, Texas Pacific Land would need to produce outstanding growth well in excess of the market.
If we review the last year of earnings growth, the company posted a worthy increase of 15%. This was backed up an excellent period prior to see EPS up by 93% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 15% shows it's noticeably more attractive on an annualised basis.
In light of this, it's understandable that Texas Pacific Land's P/E sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.
What We Can Learn From Texas Pacific Land's P/E?
The strong share price surge has got Texas Pacific Land's P/E rushing to great heights as well. 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 Texas Pacific Land revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. If recent medium-term earnings trends continue, 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 - Texas Pacific Land has 1 warning sign we think you should be aware of.
If these risks are making you reconsider your opinion on Texas Pacific Land, explore our interactive list of high quality stocks to get an idea of what else is out there.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
