Group 1 Automotive, Inc.'s (NYSE:GPI) price-to-earnings (or "P/E") ratio of 11x might make it look like a buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 20x and even P/E's above 35x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
While the market has experienced earnings growth lately, Group 1 Automotive's earnings have gone into reverse gear, which is not great. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
How Is Group 1 Automotive's Growth Trending?
There's an inherent assumption that a company should underperform the market for P/E ratios like Group 1 Automotive's to be considered reasonable.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 18%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 23% overall rise in EPS. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.
Turning to the outlook, the next three years should generate growth of 7.5% per year as estimated by the eight analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 11% per annum, which is noticeably more attractive.
In light of this, it's understandable that Group 1 Automotive's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.
The Bottom Line On Group 1 Automotive'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.
We've established that Group 1 Automotive maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
It is also worth noting that we have found 2 warning signs for Group 1 Automotive (1 is potentially serious!) that you need to take into consideration.
Of course, you might also be able to find a better stock than Group 1 Automotive. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.
