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The average price-to-earnings (P/E) ratio for the FTSE 100 is 17.7. The metric is commonly used by investors to determine if a stock is fairly valued and worth considering buying. Here are a couple of growth stocks that have ratios below the index average that I’ve noted down.
Climbing in altitude
First up is easyJet (LSE:EZJ). The airline operator is one of Europe’s major low-cost carriers. Over the past year, the stock is down 5%, with a current P/E ratio of 7.69.
The business is doing well and has now shaken off almost all of the pandemic hangover. The latest summer trading update showed that the number of passengers flown during Q3 rose 2.2% compared to the same period last year. This had a beneficial effect on profitability.
The update commented that “the outlook for FY25 remains positive, with good profit growth expected year on year, albeit impacted by recent higher fuel costs and the scale of industrial action by French air traffic control”. Those costs and uncertainty around general airport disruption remain risks going forward. However, I still think the stock is undervalued.
Part of the undervaluation could come from concern about buying the stock by investors who may have been burned during the pandemic. Obviously, no one can predict black swan events, as they are exactly that — very rare events that occur infrequently. When I set this aside and look at the growth in financials and forward orders (back in the summer, Q4 capacity was already 67% sold out), I think it’s a solid company.
Time for a drink
Another idea is Diageo (LSE:DGE). Although the P/E ratio is closer to the average at 14.63, the stock is down 29% over the past year and recently hit its lowest level in a decade.
The stock has fallen due to weak sales in some key regions, such as North America and Latin America. This has been put down to large inventory oversupply, tariff impacts, and more cautious consumer spending.
Despite this, I think the move lower in the stock is a bit overdone. The business is truly global in nature, so other regions can help offset the slow demand in some markets. Further, it caters to a wide range of customers, given that the drinks brands owned span cheap beer through to expensive whisky. Therefore, it isn’t reliant on one area of the market to survive.
At the same time, Diageo has launched cost-saving programmes and other efficiency initiatives. This should help to keep a lid on costs going forward. So even if revenue doesn’t recover that quickly, profitability shouldn’t be as negatively impacted.
Both companies have good potential to experience share price growth over the coming years, with attractive valuations. As a result, I think they are worth consideration by investors.
