Does AZZ Inc’s (AZZ) share price already account for its high growth?

Growth expectations for AZZ Inc (NYSE:AZZ) are high, but many investors are starting to ask whether its last close at $49.5 can still be rationalized by the future potential. There are some general checks that I have up my sleeve when I have uncertainties over the value a company is providing. Let’s take a look at how AZZ stacks up against these. See our latest analysis for AZZ

Can we expect AZZ to keep growing?

Earnings per share are predicted to grow anywhere from $2.04 to $3.11 in a year’s time. This indicates a relatively solid consensus earnings per share growth rate of 33.9% over the next 1-2 years, which is an optimistic outlook in the near term. In the same period we will see the revenue grow from $824 Million to $905 Million in 2019 and profit is predicted to grow from $53 Million to $80 Million in 2019, roughly growing 1.5x. Margins are expected to be rather acceptable at 8.86%.
NYSE:AZZ Past Future Earnings Aug 12th 17
NYSE:AZZ Past Future Earnings Aug 12th 17

What is AZZ’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.” AZZ is trading at price to earnings (PE) ratio of 24.2x and this tells us the stock is undervalued based on the latest annual earnings update compared to the Capital Goods average of 24.7x and overvalued when compared to the US market average of 23.6x .

NYSE:AZZ PE PEG Gauge Aug 12th 17
NYSE:AZZ PE PEG Gauge Aug 12th 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.

Is AZZ’s share price justifiable by its earnings growth?

The price-to-earnings ratio of AZZ stands at 24.2, compared to the industry average this already suggests that it could be undervalued.But to be able to properly assess the value of a high growth stock like AZZ we must include its earnings growth in our calculations using the 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.

AZZ’s PE ratio of 24.2x and estimated 33.9% growth in earnings next year give it a very low PEG ratio of 0.7x. This means that when accounting for its growth AZZ’s stock can be viewed a very good value based on fundamental analysis.

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