Is KLX Inc (KLXI) undervalued when accounting for its future growth?

KLX Inc (NASDAQ:KLXI) is considered a high growth stock but its last closing price of $46.86 made some investors wonder if it can be still rationalized by the high growth potential. Let’s look into that. See our latest analysis for KLXI

Exciting times ahead?

KLX’s extremely high growth potential is attracting investors. Analysts are estimating earnings per share to grow anywhere from $0.93 to $2.44 in three year’s time. Yes, this train officially has no brakes.

KLX (NasdaqGS:KLXI) Past Future Earnings Apr 22nd 17
KLX (NasdaqGS:KLXI) Past Future Earnings Apr 22nd 17
This will project the annual earnings to levels above what has been seen in the past few years.

Revenue during the same period is expected to grow from $1.49 Billion to $1.94 Billion in 2021 and net income is predicted to shoot up from $48 Million to $213 Million in 2020, roughly growing 4.4x. Margins are on track to be a respectable 11% during this time as well.

What is KLX’s value based on current earnings?

As Warren Buffett’s right-hand man Charlie Munger said, “No matter how wonderful a business is, it’s not worth an infinite price.” KLX is available at price to earnings ratio of 50.4x, showing us it is overvalued when compared to the US market average of 25.5x and overvalued based on current earnings compared to the Capital Goods industry average of 24.4x .

KLX (NasdaqGS:KLXI) PE PEG Gauge Apr 22nd 17
KLX (NasdaqGS:KLXI) PE PEG Gauge Apr 22nd 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 KLXI’s share price be justified by its earnings growth?

We already know that KLXI appears to be overvalued when compared to its industry average.But seeing as KLX 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.

Expected 89.1% growth in earnings next year and P/E ratio of 50.4x give KLX a very low PEG ratio of 0.6x. This means that when accounting for its growth KLX’s stock can be viewed a very good value based on its fundamentals.

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