Does Sims Metal Management Limited’s (ASX:SGM) April stock price reflect its future growth?

Sims Metal Management Limited (ASX:SGM) closed yesterday at $11.61, leaving some investors asking whether this price can still be justified by the high growth potential. Let’s see. See our latest analysis for SGM

Exciting times ahead?

According to the analysts covering SGM we should see a 21.6% increase in earnings over the next year. This would see the earnings rise to $0.88 levels. No doubt this would please existing investors who are used to $-0.09 over the past years.

Sims Metal Management (ASX:SGM) Past Future Earnings Apr 18th 17
Sims Metal Management (ASX:SGM) Past Future Earnings Apr 18th 17
This will project the annual earnings to levels surpassing that seen in recent earnings updates.

In the same period we are supposed to see the revenue grow from $4.63 Billion to $5.54 Billion in 2019 and net income is predicted to slightly grow from $114 M to $168 M in 2019, roughly growing 1.5x. Margins will certainbly be thin during this time as well.

What is Sims Metal Management’s value based on current earnings?

As the legendary value investor Ben Graham once said, “Price is what you pay, value is what you get.” Sims Metal Management is trading at price to earnings (PE) ratio of 20.3x and this tells us the stock is undervalued based on the latest annual earnings update compared to the Materials average of 29.3x and undervalued relative to the current AU market average of 20.5x .

Sims Metal Management (ASX:SGM) PE PEG Gauge Apr 18th 17
Sims Metal Management (ASX:SGM) PE PEG Gauge Apr 18th 17

P/E ratio is simply a stock’s price divided by its earnings per share (EPS). It is a straightforward and popular way of assessing how much investors are willing to pay for each dollar a company earns.

Can SGM’s share price be justified by its earnings growth?

We already know that SGM appears to be undervalued when compared to its industry average.But seeing as Sims Metal Management is thought of as a high growth stock, to properly value it we must also account for its earnings growth by using calculation called PEG ratio.

The PEG ratio (price/earnings to growth ratio) is a valuation metric used to assess the relative trade-off between the price of a stock, the earnings per share (EPS), and the company’s expected growth. Since P/E ratio is in general higher for a company with a higher growth rate, using just the P/E ratio would make high-growth companies appear overvalued relative to others. By dividing the P/E ratio by the earnings growth rate, the resulting ratio is considered to provide a more complete picture when comparing companies with different growth rates.

Based on Sims Metal Management’s predicted 21.6% growth in earnings next year and PE ratio of 20.3x we see that Sims Metal Management has a low PEG ratio of 0.9x. This means that when accounting for its growth Sims Metal Management’s stock can be viewed quite good value based on its fundamentals.

What next? If you want to look into Sims Metal Management further I recommend you take a look at our latest FREE analysis report. If you are not interested in SGM anymore, you can use our free platform to see my list of stocks which are undervalued when taking in account their future growth potential.