Is It Time To Buy Group 1 Automotive Inc (NYSE:GPI) Based Off Its PE Ratio?
This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in Group 1 Automotive Inc (NYSE:GPI).
Group 1 Automotive Inc (NYSE:GPI) is currently trading at a trailing P/E of 7.3x, which is lower than the industry average of 20.7x. While this makes GPI appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View out our latest analysis for Group 1 Automotive
Breaking down the Price-Earnings ratio
The P/E ratio is one of many ratios used in relative valuation. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for GPI
Price-Earnings Ratio = Price per share ÷ Earnings per share
GPI Price-Earnings Ratio = $74.92 ÷ $10.228 = 7.3x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to GPI, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. GPI’s P/E of 7.3x is lower than its industry peers (20.7x), which implies that each dollar of GPI’s earnings is being undervalued by investors. Therefore, according to this analysis, GPI is an under-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to buy GPI immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to GPI, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with GPI, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing GPI to are fairly valued by the market. If this does not hold true, GPI’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to add more of GPI to your portfolio. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for GPI’s future growth? Take a look at our free research report of analyst consensus for GPI’s outlook.
Past Track Record: Has GPI been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of GPI’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
