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Fortis Inc.'s (TSX:FTS) current price-to-earnings (P/E) ratio of 18.2x may appear high compared to the Canadian market, where many companies have P/E ratios below 14x and even as low as 7x. This elevated P/E ratio warrants further scrutiny to understand if it is justified.
Fortis' Performance and Growth Trends
Fortis has shown a positive trend in earnings growth, which contrasts with the broader market's downward trajectory. This performance might explain the higher P/E ratio, as investors appear willing to pay a premium for the stock based on its recent success. However, this optimism could be misplaced if future prospects do not align with current expectations.
Over the past year, Fortis reported a 6.1% increase in earnings, demonstrating respectable short-term growth. The company has also experienced a 15% rise in earnings per share (EPS) over the past three years. Despite this, forward-looking estimates from eight analysts suggest a more modest growth rate of 4.4% per annum over the next three years, which is below the broader market's projected 8.6% growth rate.
Implications of Fortis' High P/E Ratio
The higher P/E ratio of Fortis, combined with slower projected earnings growth, raises concerns about the sustainability of its current stock price. The disparity between the company's P/E ratio and its anticipated growth suggests that while investors are hopeful for a positive shift in business prospects, the analysts' forecasts do not fully support this optimism.
The elevated P/E ratio indicates that the stock may be priced for a turnaround in business performance that is not yet substantiated by analysts' expectations. Investors should consider these factors carefully, as the current pricing may be challenged by the company's future earnings trajectory.
