There's Reason For Concern Over GATX Corporation's (NYSE:GATX) Price

With a median price-to-earnings (or "P/E") ratio of close to 19x in the United States, you could be forgiven for feeling indifferent about GATX Corporation's (NYSE:GATX) P/E ratio of 19.9x. 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.

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Recent times have been advantageous for GATX as its earnings have been rising faster than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Check out our latest analysis for GATX

Keen to find out how analysts think GATX's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Some Growth For GATX?

There's an inherent assumption that a company should be matching the market for P/E ratios like GATX's to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 14% last year. This was backed up an excellent period prior to see EPS up by 81% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 11% over the next year. Meanwhile, the rest of the market is forecast to expand by 16%, which is noticeably more attractive.

With this information, we find it interesting that GATX is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. 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

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 GATX currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with GATX (at least 1 which is concerning), and understanding them should be part of your investment process.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.