Vidler Water Resources, Inc. (NASDAQ:VWTR) shares have had a horrible month, losing 25% after a relatively good period beforehand. Still, a bad month hasn't completely ruined the past year with the stock gaining 28%, which is great even in a bull market.
In spite of the heavy fall in price, given close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 17x, you may still consider Vidler Water Resources as a stock to potentially avoid with its 20.6x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
Vidler Water Resources certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Is There Enough Growth For Vidler Water Resources?
In order to justify its P/E ratio, Vidler Water Resources would need to produce impressive growth in excess of the market.
Retrospectively, the last year delivered an exceptional 79% gain to the company's bottom line. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.
Comparing that to the market, which is predicted to deliver 12% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.
With this information, we find it concerning that Vidler Water Resources is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.
What We Can Learn From Vidler Water Resources' P/E?
Despite the recent share price weakness, Vidler Water Resources' P/E remains higher than most other companies. 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.
Our examination of Vidler Water Resources revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.
Having said that, be aware Vidler Water Resources is showing 1 warning sign in our investment analysis, you should know about.
You might be able to find a better investment than Vidler Water Resources. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).
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.
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