With a price-to-earnings (or “P/E”) ratio of 9.9x Arrow Electronics, Inc. (NYSE:ARW) may be sending bullish signals at the moment, given that almost half of all companies in the United States have P/E ratios greater than 18x and even P/E’s higher than 38x are not unusual. Nonetheless, we’d need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
With earnings growth that’s superior to most other companies of late, Arrow Electronics has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you’d be hoping this isn’t the case so that you could potentially pick up some stock while it’s out of favour.
NYSE:ARW Price Based on Past Earnings October 10th 2021
free report on Arrow Electronics
What Are Growth Metrics Telling Us About The Low P/E?
In order to justify its P/E ratio, Arrow Electronics would need to produce sluggish growth that’s trailing the market.
Retrospectively, the last year delivered an exceptional 132% gain to the company’s bottom line. Pleasingly, EPS has also lifted 110% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it’s fair to say the earnings growth recently has been superb for the company.
Turning to the outlook, the next three years should generate growth of 8.9% per annum as estimated by the nine analysts watching the company. With the market predicted to deliver 12% growth per annum, the company is positioned for a weaker earnings result.
In light of this, it’s understandable that Arrow Electronics’ P/E sits below the majority of other companies. Apparently many shareholders weren’t comfortable holding on while the company is potentially eyeing a less prosperous future.
What We Can Learn From Arrow Electronics’ P/E?
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 Arrow Electronics’ analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won’t provide any pleasant surprises. It’s hard to see the share price rising strongly in the near future under these circumstances.
We don’t want to rain on the parade too much, but we did also find 2 warning signs for Arrow Electronics that you need to be mindful of.
You might be able to find a better investment than Arrow Electronics. 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).
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