When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 19x, you may consider Darling Ingredients Inc. (NYSE:DAR) as an attractive investment with its 12.3x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Darling Ingredients certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
Want the full picture on analyst estimates for the company? Then our free report on Darling Ingredients will help you uncover what's on the horizon.
Does Growth Match The Low P/E?
Darling Ingredients' P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.
Retrospectively, the last year delivered an exceptional 440% gain to the company's bottom line. Pleasingly, EPS has also lifted 401% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.
Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 9.9% per annum over the next three years. Meanwhile, the rest of the market is forecast to expand by 12% per annum, which is noticeably more attractive.
With this information, we can see why Darling Ingredients is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.
What We Can Learn From Darling Ingredients' 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 Darling Ingredients maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
And what about other risks? Every company has them, and we've spotted 2 warning signs for Darling Ingredients (of which 1 is a bit unpleasant!) you should know about.
If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.
This article by Simply Wall St is general in nature. 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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