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When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 17x, you may consider Avis Budget Group, Inc. (NASDAQ:CAR) as an attractive investment with its 8.6x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.
Avis Budget Group 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.
Does Avis Budget Group Have A Relatively High Or Low P/E For Its Industry?
We'd like to see if P/E's within Avis Budget Group's industry might provide some colour around the company's low P/E ratio. It turns out the Transportation industry in general has a P/E ratio higher than the market, as the graphic below shows. So unfortunately this doesn't provide much to explain the company's ratio at all right now. Some industry P/E's don't move around a lot and right now most companies within the Transportation industry should be getting a boost. Still, the strength of the company's earnings will most likely determine where its P/E shall sit.
Keen to find out how analysts think Avis Budget Group's future stacks up against the industry? In that case, our free report is a great place to start.
Does Growth Match The Low P/E?
In order to justify its P/E ratio, Avis Budget Group would need to produce sluggish growth that's trailing the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 52% last year. Pleasingly, EPS has also lifted 163% in aggregate from three years ago, 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 five analysts covering the company suggest earnings growth is heading into negative territory, declining 24% each year over the next three years. That's not great when the rest of the market is expected to grow by 9.2% each year.
In light of this, it's understandable that Avis Budget Group's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.
The Final Word
The price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
As we suspected, our examination of Avis Budget Group's 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.
We don't want to rain on the parade too much, but we did also find 3 warning signs for Avis Budget Group (1 is concerning!) that you need to be mindful of.
You might be able to find a better investment than Avis Budget Group. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).
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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