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CAI International, Inc. (NYSE:CAI) Could Be Riskier Than It Looks

Simply Wall St
·4 mins read

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CAI International, Inc.'s (NYSE:CAI) price-to-earnings (or "P/E") ratio of 13.5x 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 17x and even P/E's above 34x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

While the market has experienced earnings growth lately, CAI International'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.

View our latest analysis for CAI International

Does CAI International Have A Relatively High Or Low P/E For Its Industry?

It's plausible that CAI International's low P/E ratio could be a result of tendencies within its own industry. You'll notice in the figure below that P/E ratios in the Trade Distributors industry are similar to the market. So we'd say there is little merit in the premise that the company's ratio being shaped by its industry at this time. In the context of the Trade Distributors industry's current setting, most of its constituents' P/E's would be expected to be held up. Nonetheless, the greatest force on the company's P/E will be its own earnings growth expectations.

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Want the full picture on analyst estimates for the company? Then our free report on CAI International will help you uncover what's on the horizon.

Is There Any Growth For CAI International?

In order to justify its P/E ratio, CAI International would need to produce sluggish growth that's trailing the market.

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 66%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 488% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 30% per year during the coming three years according to the one analyst following the company. Meanwhile, the rest of the market is forecast to only expand by 10.0% each year, which is noticeably less attractive.

In light of this, it's peculiar that CAI International'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.

The Bottom Line On CAI International's P/E

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of CAI International's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. 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.

Before you take the next step, you should know about the 4 warning signs for CAI International (1 is significant!) that we have uncovered.

Of course, you might also be able to find a better stock than CAI International. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.