Associated British Foods plc (LON:ABF) is a stock well-positioned for future growth, but many investors are wondering whether its last closing price of £23.54 is based on unrealistic expectations. Let’s look into this by assessing ABF’s expected growth over the next few years.
Has the ABF train slowed down?
Investors in Associated British Foods have been patiently waiting for the uptick in earnings. If you believe the analysts covering the stock then the following year will be very interesting. Expectations from 20 analysts are bullish with earnings forecasted to rise significantly from today’s level of £1.158 to £1.692 over the next three years. This results in an annual growth rate of 11%, on average, which indicates a solid future in the near term.
Is ABF’s share price justifiable by its earnings growth?
As the legendary value investor Ben Graham once said, “Price is what you pay, value is what you get.” Associated British Foods is trading at price-to-earnings (PE) ratio of 20.33x, which tells us the stock is overvalued based on current earnings compared to the Food industry average of 16.9x , and overvalued compared to the GB market average ratio of 16.22x .
We understand ABF seems to be overvalued based on its current earnings, compared to its industry peers. However, to be able to properly assess the value of a high-growth stock such as Associated British Foods, we must incorporate its earnings growth in our valuation. The PEG ratio is a great calculation to take account of growth in the stock’s valuation. A PE ratio of 20.33x and expected year-on-year earnings growth of 11% give Associated British Foods a higher PEG ratio of 1.83x. This means that, when we account for Associated British Foods’s growth, the stock can be viewed as a bit overvalued , based on its fundamentals.
What this means for you:
ABF’s current overvaluation could signal a potential selling opportunity to reduce your exposure to the stock, or it you’re a potential investor, now may not be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:
- Financial Health: Are ABF’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Past Track Record: Has ABF been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of ABF’s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.