When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider Hess Midstream LP (NYSE:HESM) as a stock to potentially avoid with its 19.3x P/E ratio. 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.
Hess Midstream certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.
View our latest analysis for Hess Midstream
Does Growth Match The High P/E?
The only time you'd be truly comfortable seeing a P/E as high as Hess Midstream's is when the company's growth is on track to outshine the market.
If we review the last year of earnings growth, the company posted a terrific increase of 19%. The latest three year period has also seen a 5.4% overall rise in EPS, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 9.1% per annum during the coming three years according to the six analysts following the company. That's shaping up to be similar to the 11% per year growth forecast for the broader market.
With this information, we find it interesting that Hess Midstream is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. 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 Hess Midstream's P/E
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
Our examination of Hess Midstream's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
Having said that, be aware Hess Midstream is showing 2 warning signs in our investment analysis, and 1 of those is concerning.
You might be able to find a better investment than Hess Midstream. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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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.