There wouldn't be many who think Oracle Corporation's (NYSE:ORCL) price-to-earnings (or "P/E") ratio of 18.3x is worth a mention when the median P/E in the United States is similar at about 19x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
Oracle 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 deteriorate like the rest, which has kept the P/E from rising. 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 not quite in favour.
View our latest analysis for Oracle
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Oracle.
How Is Oracle's Growth Trending?
There's an inherent assumption that a company should be matching the market for P/E ratios like Oracle's to be considered reasonable.
Retrospectively, the last year delivered a decent 3.5% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 37% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Turning to the outlook, the next three years should generate growth of 4.0% per year as estimated by the analysts watching the company. That's shaping up to be materially lower than the 13% each year growth forecast for the broader market.
In light of this, it's curious that Oracle's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.
The Final Word
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 Oracle currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
You always need to take note of risks, for example - Oracle has 1 warning sign we think you should be aware of.
Of course, you might also be able to find a better stock than Oracle. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.
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August 31, 2020 at 05:26PM
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