With a price-to-earnings (or "P/E") ratio of 7.5x Asbury Automotive Group, Inc. (NYSE:ABG) may be sending very bullish signals at the moment, given that almost half of all companies in the United States have P/E ratios greater than 17x and even P/E's higher than 32x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
Recent times haven't been advantageous for Asbury Automotive Group as its earnings have been falling quicker than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. You'd much rather the company wasn't bleeding earnings if you still believe in the business. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.
What Are Growth Metrics Telling Us About The Low P/E?
In order to justify its P/E ratio, Asbury Automotive Group would need to produce anemic growth that's substantially trailing the market.
Retrospectively, the last year delivered a frustrating 36% decrease to the company's bottom line. Even so, admirably EPS has lifted 121% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.
Looking ahead now, EPS is anticipated to climb by 13% per annum during the coming three years according to the seven analysts following the company. That's shaping up to be materially higher than the 10% each year growth forecast for the broader market.
In light of this, it's peculiar that Asbury Automotive Group's P/E sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.
The Bottom Line On Asbury Automotive Group's P/E
Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
We've established that Asbury Automotive Group currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.
Having said that, be aware Asbury Automotive Group is showing 3 warning signs in our investment analysis, and 1 of those can't be ignored.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).
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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.