ArcBest Corporation's (NASDAQ:ARCB) 27% Share Price Surge Not Quite Adding Up
ArcBest Corporation (NASDAQ:ARCB) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 22% in the last twelve months.
Even after such a large jump in price, there still wouldn't be many who think ArcBest's price-to-earnings (or "P/E") ratio of 18.4x is worth a mention when the median P/E in the United States is similar at about 19x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.
While the market has experienced earnings growth lately, ArcBest's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is moderate because investors think this poor earnings performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.
Check out our latest analysis for ArcBest
Does Growth Match The P/E?
The only time you'd be comfortable seeing a P/E like ArcBest's is when the company's growth is tracking the market closely.
Retrospectively, the last year delivered a frustrating 48% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 67% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Shifting to the future, estimates from the twelve analysts covering the company suggest earnings should grow by 0.1% over the next year. With the market predicted to deliver 16% growth , the company is positioned for a weaker earnings result.
In light of this, it's curious that ArcBest's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.
The Final Word
ArcBest's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We've established that ArcBest currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
It is also worth noting that we have found 2 warning signs for ArcBest that you need to take into consideration.
Of course, you might also be able to find a better stock than ArcBest. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.