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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 Asbury Automotive Group, Inc. (NYSE:ABG) as an attractive investment with its 11.6x P/E ratio. Nonetheless, we’d need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

While the market has experienced earnings growth lately, Asbury Automotive Group’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.

Check out our latest analysis for Asbury Automotive Group

How Does Asbury Automotive Group’s P/E Ratio Compare To Its Industry Peers?

We’d like to see if P/E’s within Asbury Automotive Group’s industry might provide some colour around the company’s low P/E ratio. It turns out the Specialty Retail industry in general has a P/E ratio higher than the market, as the graphic below shows. So it appears the company’s ratio isn’t currently influenced by these industry numbers whatsoever. Ordinarily, the majority of companies’ P/E’s would be lifted by the general conditions within the Specialty Retail industry. Whilst this can be a heavy component, industry factors are normally secondary to company financials and earnings.

Keen to find out how analysts think Asbury Automotive Group’s future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Growth For Asbury Automotive Group?

There’s an inherent assumption that a company should underperform the market for P/E ratios like Asbury Automotive Group’s to be considered reasonable.

Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. Still, the latest three year period was better as it’s delivered a decent 8.9% overall rise in EPS. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Shifting to the future, estimates from the eight analysts covering the company suggest earnings should grow by 12% per year over the next three years. That’s shaping up to be materially higher than the 10.0% each year growth forecast for the broader market.

With this information, we find it odd that Asbury Automotive Group is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

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

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We’ve established that Asbury Automotive Group currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. 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.

Having said that, be aware Asbury Automotive Group is showing 3 warning signs in our investment analysis, and 1 of those can’t be ignored.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a P/E below 20x.

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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By ev3v4hn