Enterprise Group, Inc. (TSE:E) price is right, but growth is lacking after shares soar 26%

Group of Companies, Inc. (TSE:E) shares have had a truly impressive month, gaining 26% after a shaky period earlier. Last month caps off a massive 223% rise over the past year.

Even after such a big jump in price, Enterprise Group’s price-to-earnings (P/E) ratio of 10.7 might still make the stock look like a buy right now, compared to the market in Canada, where about half of the companies have P/E ratios above 16x and even P/E ratios above 32x are quite common. Still, we would have to dig a little deeper to determine if there is a rational basis for the reduced P/E ratio.

Enterprise Group has certainly done well recently, as its earnings growth has been positive while most other companies’ earnings have been declining. It could be that many are expecting the strong earnings performance to fade significantly, perhaps more than the market has pushed down the P/E ratio. If you like the company, you’d hope that doesn’t happen so you can potentially buy some shares while it’s out of demand.

Check out our latest analysis for Enterprise Group

Do you want the full picture of analyst estimates for the company? Then our free The Enterprise Group report will help you find out what’s on the horizon.

Does the growth match the low P/E ratio?

There is a fundamental assumption that a company must underperform the market for P/E ratios like those of Enterprise Group to be considered reasonable.

First, if we look back, we can see that the company grew its earnings per share by an impressive 127% last year. However, the long-term performance has not been as strong, with EPS growth over three years overall being relatively low. So, it seems to us that the company has had a mixed performance in terms of earnings growth during this period.

As for the outlook, next year will bring growth of 14% according to the three analysts who cover the company. With the market forecast to grow by 29%, the company must expect a weaker result.

With this information, we can see why Enterprise Group is trading at a lower P/E than the market. It seems that most investors expect limited future growth and are only willing to pay a lower amount for the stock.

The last word

The recent price increase has not been enough to bring Enterprise Group’s P/E close to the market median. It is not useful to use the price-to-earnings ratio alone to decide whether you should sell your shares, but it can be a handy guide to the company’s future prospects.

As we suspected, our study of analyst forecasts for Enterprise Group found that the weaker earnings outlook is contributing to the low P/E ratio. Currently, shareholders are accepting the low P/E ratio because they acknowledge that future earnings are unlikely to bring pleasant surprises. Unless these conditions improve, they will continue to form a barrier to the share price around these levels.

Don’t forget that there may be other risks as well. For example, we have found 2 warning signs for Enterprise Group that you should know.

Naturally, You may also be able to find a better stock than Enterprise Group. You may want to see this free Collection of other companies that have reasonable P/E ratios and strong earnings growth.

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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.