Aptiv PLC's (NYSE:APTV) price-to-earnings (or "P/E") ratio of 5.4x might make it look like a strong buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 20x and even P/E's above 36x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
Aptiv certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
How Is Aptiv's Growth Trending?
The only time you'd be truly comfortable seeing a P/E as depressed as Aptiv's is when the company's growth is on track to lag the market decidedly.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 11% last year. The latest three year period has also seen an excellent 251% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.
Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 2.8% per year as estimated by the analysts watching the company. With the market predicted to deliver 11% growth per annum, that's a disappointing outcome.
With this information, we are not surprised that Aptiv is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.
The Final Word
It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
As we suspected, our examination of Aptiv'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. It's hard to see the share price rising strongly in the near future under these circumstances.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Aptiv (at least 1 which is a bit unpleasant), and understanding these should be part of your investment process.
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.
