Potential Upside For Group 1 Automotive, Inc. (NYSE:GPI) Not Without Risk

With a price-to-earnings (or “P/E”) ratio of 9.5x Group 1 Automotive, Inc. (NYSE:GPI) may be sending bullish signals at the moment, given that almost half of all companies in the United States have P/E ratios greater than 18x and even P/E’s higher than 35x are not unusual. Nonetheless, we’d need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Group 1 Automotive has been doing quite well of late. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Group 1 Automotive

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What Are Growth Metrics Telling Us About The Low P/E?

The only time you’d be truly comfortable seeing a P/E as low as Group 1 Automotive’s is when the company’s growth is on track to lag the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 8.1% last year. Pleasingly, EPS has also lifted 31% in aggregate from three years ago, partly 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.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings growth will be highly resilient over the next year growing by 3.5%. That would be an excellent outcome when the market is expected to decline by 9.0%.

In light of this, it’s quite peculiar that Group 1 Automotive’s P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the contrarian forecasts and have been accepting significantly lower selling prices.

The Bottom Line On Group 1 Automotive’s P/E

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 Group 1 Automotive currently trades on a much lower than expected P/E its growth forecasts are potentially beating a struggling market. When we see a superior earnings outlook with some actual growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. Perhaps there is some hesitation about the company’s ability to keep swimming against the current of the broader market turmoil. It appears many are indeed anticipating earnings instability, because the company’s current prospects should normally provide a boost to the share price.

You should always think about risks. Case in point, we’ve spotted 2 warning signs for Group 1 Automotive you should be aware of, and 1 of them doesn’t sit too well with us.

If these risks are making you reconsider your opinion on Group 1 Automotive, explore our interactive list of high quality stocks to get an idea of what else is out there.

This article by Simply Wall St is general in nature. 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.

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July 27, 2020
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