Insufficient Growth At AerCap Holdings N.V. (NYSE:AER) Hampers Share Price
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AerCap Holdings N.V.'s (NYSE:AER) price-to-earnings (or "P/E") ratio of 3.2x might make it look like a strong 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 33x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
AerCap Holdings certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you 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 AerCap Holdings
Where Does AerCap Holdings' P/E Sit Within Its Industry?
An inspection of average P/E's throughout AerCap Holdings' industry may help to explain its particularly low P/E ratio. 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. Still, the strength of the company's earnings will most likely determine where its P/E shall sit.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on AerCap Holdings.
Does Growth Match The Low P/E?
AerCap Holdings' P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 30% last year. The strong recent performance means it was also able to grow EPS by 48% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 8.7% per annum as estimated by the seven analysts watching the company. Meanwhile, the broader market is forecast to expand by 9.2% per annum, which paints a poor picture.
With this information, we are not surprised that AerCap Holdings is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.
The Final Word
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.
As we suspected, our examination of AerCap Holdings' analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. 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.
And what about other risks? Every company has them, and we've spotted 3 warning signs for AerCap Holdings (of which 2 don't sit too well with us!) you should know about.
If these risks are making you reconsider your opinion on AerCap Holdings, 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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