When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 18x, you may consider Group 1 Automotive, Inc. (NYSE:GPI) as an attractive investment with its 11.6x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
We've discovered 2 warning signs about Group 1 Automotive. View them for free.While the market has experienced earnings growth lately, Group 1 Automotive's earnings have gone into reverse gear, which is not great. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. 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.
View our latest analysis for Group 1 Automotive
Is There Any Growth For Group 1 Automotive?
In order to justify its P/E ratio, Group 1 Automotive would need to produce sluggish growth that's trailing the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 16%. This means it has also seen a slide in earnings over the longer-term as EPS is down 9.0% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Turning to the outlook, the next three years should generate growth of 13% each year as estimated by the nine analysts watching the company. That's shaping up to be materially higher than the 10% per year growth forecast for the broader market.
In light of this, it's peculiar that Group 1 Automotive's P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.
What We Can Learn From 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 currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.
Before you settle on your opinion, we've discovered 2 warning signs for Group 1 Automotive (1 is significant!) that you should be aware of.
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.