Murphy USA Inc.'s (NYSE:MUSA) price-to-earnings (or "P/E") ratio of 18.3x might make it look like a sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 15x and even P/E's below 9x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.
Murphy USA hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
See our latest analysis for Murphy USA
Does Growth Match The High P/E?
The only time you'd be truly comfortable seeing a P/E as high as Murphy USA's is when the company's growth is on track to outshine the market.
Retrospectively, the last year delivered a frustrating 5.5% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 66% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.
Turning to the outlook, the next three years should generate growth of 9.0% per annum as estimated by the nine analysts watching the company. That's shaping up to be similar to the 11% per year growth forecast for the broader market.
In light of this, it's curious that Murphy USA's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.
The Bottom Line On Murphy USA's P/E
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.
Our examination of Murphy USA's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Murphy USA that you should be aware of.
If you're unsure about the strength of Murphy USA'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.