Why Eagers Automotive Limited (ASX:APE) Could Be Worth Watching

Eagers Automotive Limited (ASX:APE), might not be a large cap stock, but it saw significant share price movement during recent months on the ASX, rising to highs of AU$14.65 and falling to the lows of AU$12.24. Some share price movements can give investors a better opportunity to enter into the stock, and potentially buy at a lower price. A question to answer is whether Eagers Automotive's current trading price of AU$12.93 reflective of the actual value of the mid-cap? Or is it currently undervalued, providing us with the opportunity to buy? Let’s take a look at Eagers Automotive’s outlook and value based on the most recent financial data to see if there are any catalysts for a price change.

Check out our latest analysis for Eagers Automotive

What is Eagers Automotive worth?

The share price seems sensible at the moment according to my price multiple model, where I compare the company's price-to-earnings ratio to the industry average. In this instance, I’ve used the price-to-earnings (PE) ratio given that there is not enough information to reliably forecast the stock’s cash flows. I find that Eagers Automotive’s ratio of 18.12x is trading slightly above its industry peers’ ratio of 17.04x, which means if you buy Eagers Automotive today, you’d be paying a relatively reasonable price for it. And if you believe that Eagers Automotive should be trading at this level in the long run, then there should only be a fairly immaterial downside vs other industry peers. Is there another opportunity to buy low in the future? Since Eagers Automotive’s share price is quite volatile, we could potentially see it sink lower (or rise higher) in the future, giving us another chance to buy. This is based on its high beta, which is a good indicator for how much the stock moves relative to the rest of the market.

What does the future of Eagers Automotive look like?

Future outlook is an important aspect when you’re looking at buying a stock, especially if you are an investor looking for growth in your portfolio. Although value investors would argue that it’s the intrinsic value relative to the price that matter the most, a more compelling investment thesis would be high growth potential at a cheap price. However, with a negative profit growth of -9.1% expected over the next couple of years, near-term growth certainly doesn’t appear to be a driver for a buy decision for Eagers Automotive. This certainty tips the risk-return scale towards higher risk.

What this means for you:

Are you a shareholder? Currently, APE appears to be trading around industry price multiples, but given the uncertainty from negative returns in the future, this could be the right time to reduce the risk in your portfolio. Is your current exposure to the stock optimal for your total portfolio? And is the opportunity cost of holding a negative-outlook stock too high? Before you make a decision on APE, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping tabs on APE for a while, now may not be the most optimal time to buy, given it is trading around industry price multiples. This means there’s less benefit from mispricing. Furthermore, the negative growth outlook increases the risk of holding the stock. However, there are also other important factors we haven’t considered today, which can help crystallize your views on APE should the price fluctuate below the industry PE ratio.

So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For instance, we've identified 3 warning signs for Eagers Automotive (1 is a bit unpleasant) you should be familiar with.

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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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