Ferguson Enterprises Inc.'s (NYSE:FERG) price-to-earnings (or "P/E") ratio of 20.9x 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 Ferguson Enterprises. View them for free.While the market has experienced earnings growth lately, Ferguson Enterprises' earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.
See our latest analysis for Ferguson Enterprises
How Is Ferguson Enterprises' Growth Trending?
In order to justify its P/E ratio, Ferguson Enterprises would need to produce impressive growth in excess of the market.
Retrospectively, the last year delivered a frustrating 5.5% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 8.8% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 14% per annum over the next three years. Meanwhile, the rest of the market is forecast to only expand by 10% each year, which is noticeably less attractive.
With this information, we can see why Ferguson Enterprises is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Bottom Line On Ferguson Enterprises' 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 Ferguson Enterprises maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. 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 - Ferguson Enterprises has 2 warning signs we think you should be aware of.
If you're unsure about the strength of Ferguson Enterprises' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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.