Ares Management Corporation (NYSE:ARES) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.
Following the firm bounce in price, Ares Management’s price-to-earnings (or “P/E”) ratio of 34.7x might make it look like a strong 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 8x 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 so lofty.
With earnings growth that’s superior to most other companies of late, Ares Management has been doing relatively well. 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.
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How Is Ares Management’s Growth Trending?
Ares Management’s P/E ratio would be typical for a company that’s expected to deliver very strong growth, and importantly, perform much better than the market.
If we review the last year of earnings growth, the company posted a terrific increase of 46%. Pleasingly, EPS has also lifted 551% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.
Turning to the outlook, the next three years should generate growth of 29% each year as estimated by the nine analysts watching the company. That’s shaping up to be materially higher than the 10.0% each year growth forecast for the broader market.
With this information, we can see why Ares Management is trading at such a high P/E compared to the market. shareholders apparently aren’t keen to offload something that is potentially eyeing a more prosperous future.
The Bottom Line On Ares Management’s P/E
Shares in Ares Management have built up some good momentum lately, which has really inflated its P/E. 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 Ares Management maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn’t great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.
You should always think about risks. Case in point, we’ve spotted 3 warning signs for Ares Management you should be aware of, and 2 of them are potentially serious.
If these risks are making you reconsider your opinion on Ares Managementexplore our interactive list of high quality stocks to get an idea of what else is out there.
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