When close to half the companies in the United States have price-to-earnings ratios (or “P/E’s”) below 17x, you may consider Clearway Energy, Inc. (NYSE:CWEN.A) as a stock to avoid entirely with its 31.8x P/E ratio. Nonetheless, we’d need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
Clearway Energy 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 seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.
See our latest analysis for Clearway Energy
If you’d like to see what analysts are forecasting going forward, you should check out our free report on Clearway Energy.
What Are Growth Metrics Telling Us About The High P/E?
Clearway Energy’s P/E ratio would be typical for a company that’s expected to deliver very strong growth, and importantly, perform much better than the market.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 9.8% last year. This was backed up an excellent period prior to see EPS up by 103% 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 33% per annum as estimated by the nine analysts watching the company. With the market only predicted to deliver 10% per year, the company is positioned for a stronger earnings result.
In light of this, it’s understandable that Clearway Energy’s P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Final Word
While the price-to-earnings ratio shouldn’t be the defining factor in whether you buy a stock or not, it’s quite a capable barometer of earnings expectations.
As we suspected, our examination of Clearway Energy’s analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren’t under threat. Unless these conditions change, they will continue to provide strong support to the share price.
Before you settle on your opinion, we’ve discovered 3 warning signs for Clearway Energy (1 shouldn’t be ignored!) that you should be aware of.
If you’re unsure about the strength of Clearway Energy’s business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.