Arrow Electronics, Inc. (NYSE:ARW) stock price is in line with earnings sentiment

With a price-to-earnings ratio (or “P/E”) of 13x Arrow Electronics, Inc. (NYSE:ARW) may be sending bullish signals right now, as nearly half of all companies in the United States have P/E ratios greater than 20x, and even P/E ratios greater than 36x are not uncommon. Still, we would have to dig a little deeper to determine whether there is a rational basis for the reduced P/E ratio.

While the market has seen earnings growth recently, Arrow Electronics’ earnings have been in reverse, which isn’t great. It seems that many expect the weak earnings performance to continue, which has depressed the P/E ratio. If this is the case, existing shareholders will likely have difficulty getting excited about the future direction of the share price.

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Does the growth correspond to the low P/E ratio?

A P/E ratio as low as Arrow Electronics’s would only really be comfortable for you if the company’s growth lags the market.

If we first look back, the company’s earnings per share growth last year was nothing to cheer about as it posted a disappointing decline of 50%. This means that the company has also seen a decline in earnings over the longer term, with earnings per share falling 30% overall over the last three years. Accordingly, shareholders would have been optimistic about medium-term earnings growth rates.

As for the outlook, next year is expected to generate growth of 5.9%, according to estimates from the seven analysts covering the company. Since market growth of 15% is forecast for the market, the company expects a weaker profit result.

With this in mind, it’s understandable that Arrow Electronics’ P/E ratio is lower than most other companies. It seems that most investors expect limited future growth and are only willing to pay a lower amount for the stock.

The last word

Deciding whether to sell your stock based solely on price-to-earnings ratios doesn’t make sense, but it can be a practical guide to the company’s future prospects.

As we suspected, our review of Arrow Electronics’ analyst forecasts revealed that the weaker earnings outlook is contributing to the company’s low P/E ratio. At this point, investors believe that the potential for earnings improvement is not great enough to justify a higher P/E ratio. Under these circumstances, it is hard to imagine that the share price will rise much in the near future.

Before you take the next step, you should be clear about this 2 warning signs for Arrow Electronics that we uncovered.

Naturally, You might also find a better stock than Arrow Electronics. Maybe you would like to see this free Collection of other companies that have reasonable P/E ratios and have grown profits significantly.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.