When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 18x, you may consider Science Applications International Corporation (NASDAQ:SAIC) as an attractive investment with its 15.3x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.
Science Applications International could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.
View our latest analysis for Science Applications International
What Are Growth Metrics Telling Us About The Low P/E?
Science Applications International's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 20%. Even so, admirably EPS has lifted 60% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.
Shifting to the future, estimates from the ten analysts covering the company suggest earnings should grow by 10% per year over the next three years. With the market predicted to deliver 10% growth per annum, the company is positioned for a comparable earnings result.
In light of this, it's peculiar that Science Applications International's P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.
The Final Word
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
Our examination of Science Applications International's analyst forecasts revealed that its market-matching earnings outlook isn't contributing to its P/E as much as we would have predicted. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.
You should always think about risks. Case in point, we've spotted 1 warning sign for Science Applications International you should be aware of.
If these risks are making you reconsider your opinion on Science Applications International, explore our interactive list of high quality stocks to get an idea of what else is out there.
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