Avis Budget Group, Inc.'s (NASDAQ:CAR) Price Is Right But Growth Is Lacking After Shares Rocket 28%

Avis Budget Group, Inc. (NASDAQ:CAR) shareholders are no doubt pleased to see that the share price has bounced 28% in the last month, although it is still struggling to make up recently lost ground. But the last month did very little to improve the 51% share price decline over the last year.

Even after such a large jump in price, given about half the companies in the United States have price-to-earnings ratios (or "P/E's") above 19x, you may still consider Avis Budget Group as a highly attractive investment with its 4x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Avis Budget Group has been struggling lately as its earnings have declined faster than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

Check out our latest analysis for Avis Budget Group

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

Does Growth Match The Low P/E?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Avis Budget Group's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 60% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 740% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to slump, contracting by 22% each year during the coming three years according to the seven analysts following the company. Meanwhile, the broader market is forecast to expand by 10% each year, which paints a poor picture.

With this information, we are not surprised that Avis Budget Group is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Bottom Line On Avis Budget Group's P/E

Avis Budget Group's recent share price jump still sees its P/E sitting firmly flat on the ground. 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.

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. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you take the next step, you should know about the 3 warning signs for Avis Budget Group (2 don't sit too well with us!) that we have uncovered.

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 low P/E.

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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.