Sterling Infrastructure, Inc. (NASDAQ:STRL) shareholders would be excited to see that the share price has had a great month, posting a 59% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 58% in the last year.
Since its price has surged higher, Sterling Infrastructure's price-to-earnings (or "P/E") ratio of 19.7x might make it look like a sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 17x and even P/E's below 10x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.
We've discovered 2 warning signs about Sterling Infrastructure. View them for free.Sterling Infrastructure certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.
Check out our latest analysis for Sterling Infrastructure
What Are Growth Metrics Telling Us About The High P/E?
There's an inherent assumption that a company should outperform the market for P/E ratios like Sterling Infrastructure's to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 85%. The strong recent performance means it was also able to grow EPS by 294% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 16% as estimated by the four analysts watching the company. That's not great when the rest of the market is expected to grow by 13%.
In light of this, it's alarming that Sterling Infrastructure's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a very good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.
The Bottom Line On Sterling Infrastructure's P/E
The large bounce in Sterling Infrastructure's shares has lifted the company's P/E to a fairly high level. 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 Sterling Infrastructure's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.
Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Sterling Infrastructure (1 shouldn't be ignored) you should be aware of.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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.