With a price/earnings ratio (or “P/E”) of 9.3x The Western Union company (NYSE:WU) may be sending bullish signals right now, given that nearly half of all companies in the US have P/E ratios above 18x and even P/Es above 39x are not unusual. However, the P/E may be low for a reason and requires further investigation to determine if it is warranted.
Western Union could do better as its profits have grown less than most other companies in recent times. It seems that many expect the lackluster earnings performance to persist, which has suppressed the P/E. If so, existing shareholders will likely find it difficult to get excited about the future direction of the stock price.
free report is an excellent starting point
Does the growth match the low P/E?
There is an inherent assumption that a company would have to underperform the market for P/E ratios like Western Union’s to be considered reasonable.
Looking back, last year provided an exceptional 35% gain in the company’s bottom line. Still, EPS has barely increased for three years in total, which isn’t ideal. Therefore, it’s fair to say that earnings growth has been inconsistent recently for the company.
Looking ahead, EPS is expected to grow 6.9% annually over the next three years according to analysts who track the company. This is shaping up to be significantly lower than the growth forecast of 12% per year for the market as a whole.
In light of this, it’s understandable that Western Union’s P/E falls below the majority of other companies. Apparently, many shareholders were uncomfortable holding on as the company potentially looks to a less prosperous future.
What can we learn from Western Union’s P/E?
While the price-to-earnings ratio shouldn’t be the determining factor in whether or not you buy a stock, it is a very capable barometer of earnings expectations.
As we suspected, our review of Western Union’s analyst forecasts revealed that its lower earnings outlook is contributing to its weak P/E. At this point, investors believe that the potential for earnings improvement is not enough to justify a higher P/E ratio. It is difficult to see the share price rising sharply in the near future under these circumstances.
Additionally, you should also inquire about these 2 warning signs we spotted with Western Union.
You may be able to find a better investment than Western Union. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E of less than 20x (but have proven that they can increase their profits).
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