Cautious Investors Not Rewarding AutoNation, Inc.'s (NYSE:AN) Performance Completely

AutoNation, Inc.'s (NYSE:AN) price-to-earnings (or "P/E") ratio of 10x might make it look like a buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 18x and even P/E's above 32x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Our free stock report includes 2 warning signs investors should be aware of before investing in AutoNation. Read for free now.

AutoNation could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

View our latest analysis for AutoNation

If you'd like to see what analysts are forecasting going forward, you should check out our free report on AutoNation.

What Are Growth Metrics Telling Us About The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as AutoNation's is when the company's growth is on track to lag the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 20%. This means it has also seen a slide in earnings over the longer-term as EPS is down 17% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 11% each year as estimated by the twelve analysts watching the company. With the market predicted to deliver 10% growth per annum, the company is positioned for a comparable earnings result.

In light of this, it's peculiar that AutoNation's P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

The Bottom Line On AutoNation's P/E

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of AutoNation's analyst forecasts revealed that its market-matching earnings outlook isn't contributing to its P/E as much as we would have predicted. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.

Having said that, be aware AutoNation is showing 2 warning signs in our investment analysis, and 1 of those is concerning.

You might be able to find a better investment than AutoNation. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.