Palamina Corp (TSXV:PA), a CADCA$3.84M small-cap, operates in the basic materials industry which supplies materials for construction. This means it is highly sensitive to changes in the economic cycle, a key driver of building activities. Furthermore, the basic materials sector can be affected by shifts in the housing market, as many produced raw materials are components of construction projects. For example, if new housing development slows, the demand for metal products may also decrease. Basic material analysts are forecasting for the entire industry, a strong double-digit growth of 25.66% in the upcoming year , and an enormous growth of 64.14% over the next couple of years. This rate is larger than the growth rate of the Canadian stock market as a whole. Should your portfolio be overweight in the metals and mining sector at the moment? Today, I will analyse the industry outlook, as well as evaluate whether PA is lagging or leading its competitors in the industry. See our latest analysis for PA
What’s the catalyst for PA’s sector growth?
Overall, the basic materials sector seems to be predominantly mature in terms of its industry life cycle. Companies appear to be vastly competitive and consolidation seems to be a natural trend. There are plenty of emerging trends to deal with across the board including the reduction of waste, raw material inflation, and innovation in global supply chain management. In the past year, the industry delivered growth of over 50%, beating the Canadian market growth of 8.26%. PA lags the pack with its sustained negative earnings over the past couple of years. The company’s outlook seems uncertain, with a lack of analyst coverage, which doesn’t boost our confidence in the stock. This lack of growth and transparency means PA may be trading cheaper than its peers.
Is PA and the sector relatively cheap?
metals and mining companies are typically trading at a PE of 11x, lower than the rest of the Canadian stock market PE of 17x. This illustrates a somewhat under-priced sector compared to the rest of the market. Though, the industry returned a similar 8.60% on equities compared to the market’s 9.62%. Since PA’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge PA’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? PA has been a metals and mining industry laggard in the past year. If your initial investment thesis is around the growth prospects of PA, there are other metals and mining companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how PA fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If PA has been on your watchlist for a while, now may be a good time to dig deeper into the stock. Although its growth has delivered lower growth relative to its metals and mining peers in the near term, the market may be pessimistic on the stock, leading to a potential undervaluation. Before you make a decision on the stock, I suggest you look at PA’s future cash flows in order to assess whether the stock is trading at a reasonable price.
For a deeper dive into Palamina’s stock, take a look at the company’s latest free analysis report to find out more on its financial health and other fundamentals. Interested in other basic materials stocks instead? Use our free playform to see my list of over 2000 other basic materials companies trading on the market.